Children can be a boon at tax time, offering a variety of ways to reduce what you owe. Here's how taxpaying parents can benefit.
Is there a new baby in the house? That's good news in many ways, especially at tax time, when the chip off the old block will help you chip away at your tax bill.
A growing family makes you eligible for a variety of tax savings. You get an additional tax exemption, may be eligible for several tax credits and can use tax-favored ways to save and pay for Junior's college. You might even be able to lower your taxes by shifting some of your higher-taxed income to your youngster, either as an asset gift or as salary if you own your own business.
Here are some common tax matters every new -- or experienced -- parent needs to consider.
Filing status - The first tax-return item a taxpayer encounters is the choice of how to file. For many couples raising kids together, this is easy. The married-filing-jointly option offers a larger standard deduction and allows some tax breaks that are denied to unmarried filers.
If, however, you are raising children alone, don't shortchange yourself by choosing the wrong status. You can file as a head of household if, for more than six months, you provided more than half the cost of keeping up a home for yourself and your kids. Tax rates and the standard deduction for head-of-household filers are more favorable than those for the single or married-filing-separately categories.
Parents who have lost spouses also have a choice. You may file as a qualifying widow or widower with a dependent child for two years after the year your husband or wife died. This status gives you the same filing consideration afforded to married filers.
Exemptions, aka dependents - More child-related tax savings come from the personal exemptions you claim on your return. Each dependent is an exemption. The Internal Revenue Service sets an annually adjusted amount that you multiply by the number of your exemptions and subtract from your income.
Determining whether your child is a dependent is not a problem when you have young kids at home. But what about when they earn their money from an after-school job or are off at college? While you may have to do a little figuring, especially to see if your young worker needs to file his or her own tax return, this generally won't invalidate your child's status as your dependent. The key considerations are whether you are the child's primary source of support or if he or she is a full-time student.
Tax advantages for seniors - Single parents have some other matters to consider. Where a formal divorce decree is involved, be sure you follow the custody rules set out there. They determine who gets to claim the children. When custody is shared, parents must decide who claims the kids.
Tax credits - Your growing family could pay off via several tax credits. The great thing about tax credits is that they reduce your tax liability on a dollar-for-dollar basis. A credit of $500 could cut your $1,000 tax bill in half. If you owe no tax, some credits will even get you a refund.
Calculator: Should you adjust your withholding? The easiest child-related credit to claim is called simply that, the child tax credit. There are no records to keep or extra forms to file to get a $1,000 credit for each child younger than 17 who's claimed as a dependent on your tax return.
If you claim tax relief for more than one kid, you must fill out Form 8812 to compute the additional child tax credit, but the paperwork could be well worth it. This tax break allows filers who owe little or no taxes to get a refund check from the IRS.
Working parents who put the kids in day care can file for the child-and dependent-care credit to recoup some of those costs -- up to $3,000 spent to care for one youngster under age 13, and $6,000 for two or more preteens. And if your child arrived via adoption, there's a tax credit for that, too. (Adopted From http://money.msn.com/tax-plannin)
