Children
Can Help You Earn Tax Credits
For some years now, working
parents have been eligible for a tax credit to help defray the cost of caring
for dependents. Starting in 1998, regardless of whether or not they are working,
all taxpayers with qualifying children under age 17 as of the end of the year
may be entitled to a new child tax credit.
You don’t need to itemize
your deductions in order to be eligible for these two tax credits. What’s
more, unlike deductions and adjustments, which are subtracted from your income,
a credit is especially valuable because it is a dollar-for-dollar subtraction
from the tax you would otherwise owe.
Working
Parents Can Claim Dependent Care Credit
The dependent care credit is available to working parents who meet
certain requirements. The child or dependent expenses you incur must be
necessary for you, and your spouse if married, to be employed or to actively
seek employment away from home, and you must provide more than half the cost of
maintaining a home you live in with the person(s) for whom you are taking the
credit. Qualifying dependents include (1) a child under the age of 13 whom you
can claim as a dependent, (2) a spouse who is physically or mentally incapable
of self care, and (3) other dependents, regardless of age, who are physically or
mentally incapable of self care.
The child-care credit is based on your adjusted gross income (AGI), and
ranges from a low of 20 percent to a high of 30 percent of expenses paid during
the year. If your AGI comes to $10,000 or less, the 30-percent credit applies.
If your AGI exceeds $28,000, the 20-percent credit applies. When your AGI falls
between $10,000 and $28,000, the 30-percent credit is reduced by 1 percent for
each $2,000 of AGI in excess of $10,000. For example, a person with an AGI of
$20,000 would qualify for a 25-percent credit. If you’re married and living
together, you must file a joint return to claim the credit.
The credit applies only to employment-related childcare expenses of up to
$2,400 for one dependent and $4,800 for two or more dependents. These limits
apply even if your actual expenses are much greater. The IRS defines
employment-related expenses as the cost of hiring a babysitter, companion,
caretaker, or nurse to care for your dependent or to provide household services,
such as cleaning and cooking.
You can include the money you pay certain relatives to help you, as long
as they can’t be claimed as dependents by either you or your spouse. For
example, payments you make to your sister to look after your bedridden mother
qualify, provided that you don’t show your sister as an exemption. However,
you may not count payments to a son or daughter who is under the age of 19 and
cares for a younger sibling.
To take advantage of the dependent care credit, you must provide your
child-care provider’s Social Security number (or other taxpayer identification
number) along with the person’s name and address on Form 2441, Child
and Dependent Care Expenses, which you file with your return.
If your employer provides a dependent-care assistance plan, you may not
be eligible for the child-care credit. This is because the law says the amount
of expenses eligible for the credit must be reduced dollar-for-dollar by the
amount of expenses paid for by employer-sponsored dependent care assistance
programs. You should run the numbers to decide whether the child-care credit or
the dependent-care assistance plan provides the greater tax benefit to you.
Child
Credit Available To All Parents
Beginning in 1998, a new tax credit is available for each qualifying
child who is under the age of 17 at the close of the tax year. The amount of the
credit will be $400 per child for 1998 and increases to $500 per child for 1999
and thereafter. A qualifying child is a child, grandchild, stepchild, or
eligible foster child for whom you can claim a dependency exemption. The child
must be a U.S. citizen, resident, or national.
The child tax credit begins to phase out if modified AGI exceeds $110,000
for married couples filing joint returns, $75,000 for single filers, and $55,000
for married persons filing separately. For each $1,000 (or fraction thereof) of
AGI in excess of the threshold amount, the credit is reduced by $50.
The child credit and dependent care credit provide valuable tax breaks
for those who support others. and you should carefully consider the income
thresholds for each of the credits as you plan your 1999 taxes.