If you have children, you will be happy to learn that the tax code favors you.
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Whether you are single or married, there are benefits to folks with offspring. Congress recently extended the $1,000 child tax credit for two years, through Dec. 31, 2012; it was scheduled to revert to $500 per qualifying child.
Parents also have the Dependent Care Credit and the Earned Income Tax Credit, which was enhanced to cover three or more children rather than two. Here are some other tips parents should know:
1. Check your filing status. Years ago my masseuse asked me to look over her tax return. “It's odd; I’ve never had to pay before,” she told me. “I’ve always gotten a refund. This year my CPA says I owe $2,000; that’s how much I usually get as a refund. There’s not much difference between my income this year and last year.” The problem was filing status: She was listed as single rather than head of household. Not only is the tax bracket a bit higher for single, but that filing status blew her out of the water for enjoying the Earned Income Tax Credit. Correcting her filing status provided her with a refund of $2,600.
If you are a single parent and your child is away at college and you pay for more than 50% of her support, you may still take the head of household filing status because the child’s absence is considered temporary.
2. File first. If you suspect your ex will try to take your kid(s) as dependent(s) when you are entitled to the deduction, make sure to file your taxes first. The IRS will not get in the middle of a domestic dispute; whoever files first gets the deduction. If the later-filing party is entitled to the deduction, he or she will have to make a case for it.
3. Documentation. In conjunction with No. 2, keep important information relating to the validity of deducting your dependent in your tax file. This includes paperwork such as school records which show the child lived at your address and records to prove that you provided more than 50% of the child’s support.
4. Dependent Care Credit. The amount of eligible expenses for this credit has been increased to $3,000 from $2,400 for each child. The maximum credit has been increased to 35% from 30% of total expenses. At the end of the year, ask your child care provider for a statement showing how much you paid. Make sure you have the provider’s federal ID number or Social Security number and address in order to take the Dependent Care Credit.
5. Track alimony payments. This is taxable income for the recipient and must be reported on your income tax return. By the same token, alimony you pay is a tax deduction. Child support is not taxable income to the recipient nor is it deductible for the one who pays it. Keep that in mind if you are getting a divorce so that support issues are structured fairly in the marital dissolution agreement.
6. Tuition. Tax credits are available if you pay tuition to a qualified higher learning institution. Payments for books, computers, and fees also qualify for the credit. Room and board do not. Naturally, there are income limitations. It often works out to this: if you can afford to pay for your kid’s college education, you don’t qualify for the credit. Tuition for private schools for K-12 does not qualify for the deduction.
7. Tutoring. If your child is diagnosed with a learning disability and special schooling or tutoring is required, you may be able to deduct those fees as a medical expense. Check with your tax pro.
8. Adoption Credit. Taxpayers who incur qualified adoption expenses may be eligible for this credit or, in the case of employer-provided assistance, an exclusion from income. In other words, it can qualify as nontaxable fringe benefit. The dollar limitation has been increased to $10,000 and the credit itself has been increased by an additional $1,000 for 2010 and 2011. And great news --it’s refundable.
9. Employer-Provided Child Care. This was due to sunset on Dec. 31, 2010 but has been extended for two more years. Employers that provide child care facilities may be eligible for a tax credit equal to 25% of qualified expenses plus an amount equal to 10% of qualified expenses for child care resource and referral services. The credit caps at $150,000 of annual qualified costs.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know,” available at all major booksellers. Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.