Tax Tips - Be an informed taxpayer!

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December 2000

TAX BREAKS RELATING TO CHILDREN
Long ago the Federal Government realized how important the family unit was to the welfare and betterment of our country.  Because of this, numerous credits and deductions have been incorporated into the tax laws over the years to help families reduce their additional burdens that owing taxes would cause when trying to house, clothe, feed and educate their children.
The following are summary descriptions of many of the various deductions and credits available just for having children.

PERSONAL EXEMPTION

Every parent, or parents when filing jointly, receives an exemption not only forthemselves, but for each child.  For the 2000 tax year, the personal exemption is:
 

 
In New Jersey, additional personal exemptions are allowed for children attending college.  For a taxpayer in the 28% Federal tax bracket, the personal exemption translates into a tax saving of $784 per child.

CHILD TAX CREDIT

Now in its third year, the Federal Government allows a dollar-for-dollar tax reduction up to $500 for each child under the age of 17.  Thus, a family with four children, for example, would automatically have its Federal tax liability reduced by
$2,000.  Additionally, there is no limit on the number of children a family has that it can claim the credit for.

DEPENDENT CARE CREDIT

While much more established in the tax law than the Child Tax Credit, the Dependent Care Credit is much more restrictive.  In order to qualify for the Dependent

Care Credit, both the father and mother must be employed or be active in a money-making business.  Additionally, regardless of the number of children in the family, only two children, under the age of 14, can qualify to be eligible for the credit.

A maximum of $2,400 paid for child care for each of the two eligible children, for a total of $4,800, goes into the computation of the credit.  For most taxpayers, twenty percent (20%) of the allowable dependent care expenses paid, or $960, is allowable as a credit.  Additionally, New York State follows the same rules, up to a maximum credit of $192.

Realizing these severe limitations with the Dependent Care Credit, Congrss has taken steps to increase its benefits.  It has allowed Section 125 cafeteria plans, offered by most employers of any size, to have the employee contribute up to $5,000 to a separate fund to be used for dependent care expenses.  Here, the taxpayer has his Federal taxable income reduced, saving both income tax and social security and medicare tax.  A person in the 28% bracket would thus save $1,400 of income tax, plus an additional $385 of social security and medicare taxes, for a total savings of $1,785.  This yields additional tax savings of $825 over the conventional Dependent Care Credit.  Also, the Section 125salary reduction is fully available even if the family has only one child.

ADOPTION CREDIT

Also fairly new, this credit is intended to provide not only an inducement forpeople who cannot have children on their own, but to also help with the sizable costs involved with adopting a child.  Qualifying individuals can claim a credit up to $5,000 in the year a child is adopted.

CREDITS AND DEDUCTIONS RELATED TO EDUCATION

Children don't stay small or in day care forever.  Chances are, when they grow up, they will go to college.  Also new, the HOPE and Lifetime Learning Credits allow taxreductions up to $1,500 per student in his lifetime.  In addition, interest on qualified student loans are eligible to reduce income regardless if one itemizes deductions or notFinally, tuition expenses to better oneself in his profession is allowable as a miscellaneous itemized deduction.

CONCLUSION

As one can see, there is a lot of help available in reducing taxes while raisingchildren.  However, one must keep in mind that the credits and deductions explained above are either phased out gradually or eliminated completely as various income levels are attained.  In order to determine how much of the above credits would be available, one should consult a tax profession.

March 2000

You can still get a 1999 Tax Deduction in 2000!!
Contributions to individual retirement accounts.
If you are not covered by a plan where you work - you can contribute $2,000 for yourself and $2,000 for your spouse by 4/17/2000 and get a deduction on your 1999 return.
If you are in the 28% bracket, you will save up to $1,120 of tax.
If married and one spouse is covered by a plan and the other is not - the non- covered spouse can contribute $2,000 to an IRA and get a deduction if total family income is under $160,000.
If you are covered by a plan, you can still make a contribution and get a deduction if your income is less then:

Single:$40,000

Joint: $60,000

February 2000

It is now tax time!!! You have probably by now received your W-2's and bank 1099's, and you probably have a good idea as to whether you owe money or will be getting a refund on your 1999 tax returns.
This is the best time to adjust your exemptions to adjust your tax withholdings to an amount that, over the course of the year, will approximate your actual tax liabilities. Getting too big of a refund is like giving the government an interest-free loan, and having a tax bill could cause you to owe interest and penalties, not to mention having to come up with the money to pay the taxes.
REMEMBER - the lower number of exemptions, the more tax that is withheld