Children mean tax breaks, but rules often tricky

Posted: Sunday, February 04, 2001

WASHINGTON -- The unbridled joy of children extends into to the federal tax code, where parents can qualify for breaks for education expenses and student loans, adoption costs and even for simply having a child at all.

The rules can be tricky, however, and complex family relationships like divorce can raise a whole set of complications.

For instance, the $500 per-child tax credit applies to every child who was age 17 or under at the end of calendar year 2000. But that amount begins to phase out for married people filing jointly with more than $110,000 in adjusted gross income and above $75,000 for single filers, according to the Internal Revenue Service

Similarly, each child claimed as a dependent translates into a $2,800 exemption.

But there are special rules for divorced parents, which generally give the exemption to the parent who has custody for most of the year -- unless that parent chooses to relinquish the exemption. Form 8332 can be used to give up the claim.

A person can't be claimed as a dependent if he or she earns more than $2,800 in income, unless that person is 19 or younger at the end of the tax year. Students must have full-time status for at least five months and be under 24 at year's end.

Even if these tests are met, high-income taxpayers can lose some of the dependent tax benefits if their incomes exceed $193,400 for a married couple filing jointly, $128,950 for singles.

A reminder: the IRS requires that Social Security numbers be listed on Form 1040 for every dependent claimed as an exemption.

Other important tax benefits for children:

n A tax credit up to $5,000 can be claimed for the costs of adopting a child, $6,000 for adopting a special needs child. Examples of these expenses, according to the IRS, are court costs, adoption fees, travel expenses and attorney fees. These credits are phased out above certain income levels and there are timing rules regarding when they can be claimed. IRS Publication 968 spells it all out.

n There is a new definition for foster children to qualify for either the $500 child tax credit or the earned income tax credit. The child must now be the taxpayer's sibling, stepsibling or a descendent of one of these, or have been placed with the taxpayer by an authorized placement agency.

In the past, the child simply had to live with the taxpayer for the entire year and had to receive care as if the child were the taxpayer's own. Now, all three definitions apply.

n Up to $2,000 of student loan interest can be deducted this year, up from $1,500 in 1999. But the deduction isn't available for taxpayers with incomes above $75,000 for married couples filing jointly and above $55,000 for singles.

n For lower-income families, the number of children determines whether they can claim between $2,353 and $3,888 under the earned income tax credit. This credit is refundable, meaning taxpayers can claim it even if they paid no income tax during the year. Publication 596 details this credit, which can be complicated.

n The Hope Scholarship credit worth up to $1,500 can be claimed for college tuition and fees, but not room and board, for the first two years of school. The Lifetime Learning credit of up to $1,000 can also be used for college costs, but not for a student also claiming the Hope credit. Income limits apply to these credits; use IRS Form 8863 to claim them.

n A tax credit of up to 30 percent of expenses is available for child and dependent care expenses necessary for a parents who work or are looking for work. The child has to be under age 13 at the end of the tax year. IRS Publication 503 has the details.

For people who hire someone to care for children in the home, Publication 926 goes over an employer's tax responsibilities.

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