In the final part of our Children and Taxes series we will discuss the tax implications of children transitioning into adulthood.

Personal Exemptions

For tax year 2014 the IRS allows a $3,950 personal exemption deduction for each person on the tax return. For a married filing jointly couple with a child they would be entitled to $11,850 for the three of them so you can see how this adds up in households with multiple children. Personal exemptions directly reduce taxable income. A personal exemption can be claimed for both a qualifying child and a qualifying relative. For the scope of this discussion we will cover the requirements for a qualifying child:

  • The child must be a son, daughter, stepchild, eligible foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or adopted child. The child could also be a child of any of the before mentioned individuals like a grandchild or niece/nephew.
  • The child must be under the age of 19 or under the age of 24 and a full-time student. Keep in mind age is determined as of December 31st of the preceding tax year.
  • The child must live with the taxpayer the entire year except for short term absences in the case of a student living away at college.
  • The child must not provide more than half of their support. They are still allowed to have a job and may be required to file their own tax return depending on the situation.
  • Only one person can claim a child. In the event of divorced parents there are rules for determining who can claim the child.

Tuition and Fees

In addition to allowing the personal exemption benefit to continue through college there are tax benefits that parents can utilize for tuition and fees paid for education. Expenses covered are qualified tuition and related expenses including books and other required course materials. Parents have the option to claim the Tuition and Fees Deduction or the American Opportunity Tax Credit when filing a single, head of household or married filing jointly return. The Tuition and Fees Deduction is a reduction in adjusted gross income up to $4,000 of qualified expenses. The American Opportunity Tax Credit is up to $2,500 of qualified expenses. To claim the American Opportunity Tax Credit the expenses must be for the first four years of postsecondary education, the student must be pursuing a degree, must be enrolled at least as a half-time student, and must not have a felony drug conviction. The Tuition and Fees Deduction can be taken even if one or all of the credit requirements are not met. Like most deductions and credits, the IRS imposes income limitations to be able to take advantage of these credits that are adjusted for inflation each year. For our clients we calculate which will provide the most benefit if they qualify for both the deduction and credit.

Throughout the Children and Taxes series we have highlighted many of the tax benefits that children can bring. It is important to note that many of these benefits are phased out for high income earners and the rules for taking advantage of them can be complicated. Consult your tax professional to make sure all the benefits are captured.