As April 15 inches closer for U.S. tax filers, it’s time to get serious about looking for income tax breaks. This includes tax credits and tax deductions related to your children. Indeed, the fact that you have a family plays heavily in your favor at tax time, with existence of a number of tax breaks. Look through your expenses for last year (2009), and consider what is coming up for 2010. Get together your documentation, and find out if you are eligible for some of the tax breaks that come with children. If you don’t think you’ll have time to do a thorough job, you can consider a tax return filing extension so that you have the time you need to make sure you turn in an accurate tax return that includes all of the breaks you are entitled to, including these 7 tax breaks that you can enjoy, thanks to your children:
- $1,000 Child Tax Credit: It you have a child under the age of 17 for the full year, you can get a $1,000 tax credit. A tax credit acts sort of like a gift card. You apply it after you have figured how much tax you owe, reducing the amount you have to pay. There is a phase out, though. For single parents, that phase out starts when adjusted gross income reaches $75,000 and for couples it starts at $110,000. You lose $50 of credit for every $1,000 you are over the cut off.
- $3,650 Dependent Exemption: If your child is 18 and under, or a full-time student 23 and under (and not claimed as a dependent elsewhere) for part of the tax year, you can claim a dependent exemption. There is no age limit for disabled children. Phase out begins at $250,200 for married filing jointly in 2009. But watch out! That pesky AMT can phase you out at lower incomes.
- Adoption Credit: You are eligible for a credit of up to $12,150 (dollar for dollar) in the year that you adopt a child. If you paid the expenses in the prior year, those are still eligible. You can actually carry forward some of your expenses as well. For special needs adoptions, you are eligible for the entire credit, even if your expenses did not reach $12,150. Phase out begins for couples who make $222,180.
- Dependent Care Credit: If you pay for child care, you can get a credit to offset some of the costs — 20% of what you pay, up to $3,000 for one child and up to $6,000 for more than one. Except in the case of disability, the child must be 13 and under when you pay the expenses. Eligible expenses include daycare, paid preschool, nanny services and after-school care. Private, paid day school isn’t eligible.
- Dependent Care Account: This works if you’ve got an awesome employer that offers the option of diverting some of your money to pay for eligible child care costs. You can put up to $5,000 per couple into the account pre-tax, lowering your taxable income. However, it is important to note that you have to coordinate this effort with dependent care credit. Using this option means that you won’t get the dependent care credit in full.
- Kids’ Accounts: You can use investment accounts in your children’s names for sheltering purposes. You open custodial accounts in your kids’ names, and the first $950 of income isn’t taxed. The next $950 is taxed at 10% — which is the child tax rate. Everything after is taxed at whatever rate you pay. Good uses for money in these kinds of accounts are for non-essential expenses, like summer camp, music lessons and other costs.
- 529 Contributions (State): No, you can’t get a federal tax deduction from 529 contributions. But in 34 states and the District of Columbia, you can get get a deduction for contributing to the plans offered by those states. In some states, you can even get a tax break for contributing to a plan out of state. Double check the state income tax break possibilities for 529s in your location.
Before you take any of these tax breaks, double check your eligibility. You want to be sure that you really are allowed to enjoy these breaks. You can consult with a tax professional to get a better idea of what you are eligible for.