As you rush to finish your tax return this year, don't overlook the ways your children (or grandchildren) can save you money.
As a busy parent, you may feel fortunate just to finish your income tax returns by April 15, let alone find the time to investigate ways to reduce your state and federal income tax bills
But devoting a few extra minutes of your precious time to these potential tax breaks could save hundreds or thousands of dollars on what you owe to Uncle Sam for 2014, as well as in the years to come.
1. Think Broadly About Who Depends on You
Each dependent you declare on your 2014 tax return can reduce your taxable income by $3,950. In the 25% federal tax bracket, that’s a tax savings of almost $1,000. And the IRS allows a broader scope of this definition than what you might imagine.
The dependent must be a U.S. citizen or resident and can’t be declared as a dependent by anyone but you. He also can’t file a joint tax return with someone else (i.e. the dependent’s spouse).
Children have to be related to you via birth, adoption, “step-” status, or under certain types of foster care. Children of all of these people (i.e. your grandchildren) may qualify as your dependents as well, if the other standards are met.
Qualifying dependents usually have to live with you for at least half of the year, and be under age 19 (age 24 if they are full-time students). Although they can earn money, you have to provide at least half of their support.
2. Make Sure Your Child Has a Social Security Number
With the child tax credit, you can reduce your tax bill by as much as $1,000 for every child under your care who was under age 17 at the end of 2014—if you meet a few conditions.
You must be able to claim the child as a dependent, and she can’t have provided more than half of her support. She also must have lived with you for at least half of the year.
Last but not least, she must have a federal taxpayer identity number (usually the child’s Social Security number), so this is a good motivator for parents of a newborn baby to get going on that process as soon as possible.
Your ability to claim this credit may also be limited by your income. For married couples filing jointly, the credit starts to be phased out when modified gross income (MAGI) hits $110,000 ($75,000 for single filers).
Also, you have to file form 1040, 1040A, or 1040NR to receive the credit—using the 1040EZ form won’t cut it. For more information download Publication 972 and Schedule 8812 at IRS.gov.
3. Don’t Overlook Any Helpers
The child and dependent care credit delivers another big tax cut to parents who work outside of the home and pay someone to care for children who were age 12 and under at the end of the tax year. Money paid to caregivers who are your spouse, the child’s parent, a dependent of yours, or your child is not eligible.
The limit on qualifying expenses is $3,000 for one child, and $6,000 total for multiple children. The tax credit ranges from 20% to 35% of the qualifying amount, depending on your income.
The expense can’t exceed the lesser of your (or your spouse’s) earned income. If you withhold any pre-tax funds from your paycheck to a dependent day care flexible spending account, you must use any tax-free distributions from that account against the $3,000/$6,000 limits of the tax credit.
Best of all, as long as your situation meets the aforementioned criteria, you can include last summer’s day camp expenses in the total, even if the camp focused on a particular athletic or skill development. Unfortunately, overnight camp costs, summer school, and tutoring expenses don’t qualify.
For more information download Publication 503 (Child and Dependent Care Expenses) at IRS.gov.