Tax Tip

Children can mean extra tax deductions, credits


Published: Wednesday, January 26, 2011 at 9:52 p.m.
Last Modified: Wednesday, January 26, 2011 at 9:52 p.m.

Washington - As any parent knows, the pitter patter of little feet — and bigger ones too — can be a drain on the wallet.

But when it comes to taxes, your children can mean extra deductions and credits.

First, for each dependent child, you can take a $3,650 personal exemption. The more children, the more exemptions you can take. Each personal exemption serves to reduce your income.

Children under age 19 can be claimed as dependents; those under 24 if they are full-time students. Children 24 or older who are full-time students can be claimed provided their income is less than $3,650. Age limits do not apply to disabled children.

If parents are divorced, only one may claim the child as a dependent. Child support is not taxable as income, although alimony is.

The child tax credit has been expanded and will impact more people, said Greg Rosica, tax partner at Ernst & Young. For parents to qualify for the credit of up to $1,000, their child must be under 17, must be claimed as a dependent on the parents' tax return and must have lived at home for more than half the year. Only U.S. citizens, nationals or legal residents are eligible. As with many other credits, this one begins phasing out at higher incomes.

If the credit exceeds the income tax owed, taxpayers may be eligible for the Additional Child Tax Credit, which is refundable. That means you may be able to get the money even if you don't owe taxes.

For the 2010 tax year, there's also an expanded credit for parents who adopt a child. Mark Steber, chief tax officer for Jackson Hewitt, called it "larger and more lucrative" than prior adoption credits. The maximum credit is $13,170 for each child, up from $12,150 in 2009.

"In general," the Internal Revenue Service says, "the credit is based on the reasonable and necessary expenses related to a legal adoption, including adoption fees, court costs, attorney's fees and travel expenses." Eligibility for the credit begins phasing out for taxpayers whose adjusted gross income exceeds $182,520.

In another change from 2009, the adoption credit is refundable. Thus, qualified people will get the money even if they have no tax liability. There's a special form that must be filled out, Form 8839. Documentation showing the adoption was completed also must be provided. That means taxpayers who want to claim the credit cannot file electronically.

Another credit available to many parents with lower incomes is the Earned Income Tax Credit. The maximum income a family can have and still qualify is now $48,362. Actual credit amounts vary, depending on income, family size and other factors. Though a family with three or more children typically qualifies for the largest amount, the average credit last year was about $2,000.

As children get older and outgrow their clothing, consider donating the items they can no longer wear to charity. If the charitable organization meets the criteria established by the IRS, the donation could translate into a tax deduction. But remember that used items usually sell for far less than new ones. Only the fair market value of the item is deductible, and the item must generally be in good condition.

For parents of older children, the American Opportunity Credit could provide some relief from the cost of higher education. The credit, in its second year as an expanded version of the Hope credit, is a maximum $2,500 of the cost for tuition and other higher education expenses. The credit can be used for the first four years of college, compared to the first two years for the Hope credit. Students must be enrolled at least half-time. "If you have multiple students that you're paying for, you get to claim the credit for each of them," said Kathy Pickering, executive director of the Tax Institute at H&R Block.

The credit, which is partially refundable, also phases out at higher incomes.

For those that don't qualify for the American Opportunity Credit, another option might be the tuition and fees deduction of up to $4,000. The deduction doesn't require someone to attend school at least half-time.

"You cannot use both for the same expenses," Pickering cautions.

The IRS advises that "though the credit will usually result in greater tax savings, taxpayers should calculate the effect of both on the tax return to see which is most beneficial — the tax credit or the deduction."

The tuition deduction was included in the tax law passed last month by Congress. Because it came so late in the year, the IRS said it needs time to update its systems.

As a result, people claiming the tuition deduction will have to delay filing returns until mid-February.

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