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Part IX -- Tax
There are several tax implications to becoming a parent that you should be aware of. The two most important involve the issue of filing with dependants and utilizing child tax credits to your advantage.
Dependant exemptions
Exemptions enable the taxpayer to take a deduction from adjusted gross income. You may be able to get at least one exemption for each person in your household. There are two main types of exemptions: personal exemptions and exemptions for dependents.
There are five tests that must be met for a person to qualify as your dependent. The tests include:
- Relationship Test- This person must be either your relative or have lived in your home as a family member all year.
- Joint Return Test- If the person is married, he or she cannot file a joint return. But the person can file a joint return if the return is filed as a claim for refund and no tax liability would exist for either spouse if they had filed separate returns.
- Citizen or Resident Test- the person must be a US citizen or resident alien, or a resident of Canada or Mexico
- Income test- the person's gross income must be less than $2,750. But your child's gross income can be $2,750 or more if he or she was either under age 19 at the end of 1999 or under age 24 at the end of 1999 and was a student
- Support test- You must have provided over ½ of the person's total support in 1999. But, there are two exceptions to this test: one for children of divorced or separated parents, and one for persons supported by two or more taxpayers.
Conditions of dependent exemptions are subject to many exceptions and special interpretations. We recommend you seek professional advice when dealing with some of the more complex issues.
Credits
Unlike deductions and exemptions, tax credits actually lower your tax bill by one dollar for every dollar of credit you receive. One of the most common types are dependent care credits.
Sounds strange, but your kids can actually save you money! You may be able to take this credit if you have paid someone to care for your child under age 13 or your dependent or spouse who could not take care for himself or herself. The child must be your own son or daughter, grandchild, stepchild or foster child and must be a U.S. citizen. This credit decreases as your Adjusted Gross Income increases.
A percentage of childcare costs will be deductible at tax time, so keep records of all your childcare costs (if you've been using daycare you'll need to provide the operator's license number). You are not eligible for this break, however, if you are enrolled in a flexible spending plan.
Flexible spending accounts. Some companies offer a benefit that allows parents to designate an amount between $2,000 and $5,000 that will be deducted from their gross income and used to defray child care costs, thus reducing taxable income.
The IRS offers a publication called "Household Employer's Tax Guide." To order one call 800-TAX FORM or check out the IRS Web site at www.IRS.gov.
HerTip: If a woman adopts a child under 18, she may qualify for tax credits up to $5,000. More credits go to adoptive parents of medical or physically handicapped children.
Continue to: IX: College Planning
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