Do you have children or help take care of a relative? If you do you will happy to know that you can have a reduction in taxes as a result. There are 3 ways having children can help reduce your taxes namely:
- By claiming them as a dependent
- Claiming the child tax credit
- Claiming the earned income credit.
Claiming your child as a dependent
Your children can help you reduce your taxable income so you pay taxes on a lesser percentage of your income. To claim your child as a dependent, you must meet the following tests:
Relationship test
The child must have some kind of relationship to you whether it is your son, daughter, and step or foster. Also included could be a siblings, half or step brother or sister and any descendants (for example your grandchild, niece or nephew).
Age test- A child must be either
- under the age of 19,
- A student under the age of 24 or permanently disabled.
- The child must be younger then you or your spouse in less disabled.
Residency test-
The child must live with you for more than six months. There are special circumstances for death or birth of a child, kidnapped children, and children of divorced or separated parents.
Support test
You must have provided more than half of the support for the year. (For example if your child has a job and provides 3,000 to his/her support and you only provide 2,000).
Joint return test
The child can’t file a joint return. The only exception is if your child and their spouse are not required to file a tax return but do file only to get a refund on the withheld taxes.
The child tax credit
The child tax credit is a tax credit that can be used to reduce your tax obligations. In 2013, the credit was as much as $1,000 for each qualifying child. A tax credit is better than a deduction as described above. This is because a deduction reduces your taxable income, a credit is a direct reduction of your tax obligations.
In order to claim this credit you must do the following:
- File a 1040 or 1040A.
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Have a qualifying child
- To qualify the child must be claimed as a dependent on your return
- Must be a US citizen
- The child must be under the age of 17: The child tax credit has a stricter age restriction than claiming a child on your tax return.
Limitations on the child tax credit
- As mentioned earlier, a tax credit is a direct reduction of taxes.
Therefore your credit is reduced if you have no tax to reduce.
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Your tax credit will be reduced if your 2013 modified adjusted gross income is more than:
- 110,000 married filing jointly,
- 75,000 single or head of household or
- 55,000 married filing separately.
The earned income credit
The earned income credit works like a tax bonus for people who meet the income requirements. To qualify for the earned income credit, you must meet the following requirements for 2013 tax return:
- Your AGI cannot exceed $51,567 if married filing jointly or $46, 227 otherwise
- You must have a valid social security number
- Your filing status cannot be married filing separately
- Your must be a US Citizen or resident alien all year
- You cannot claim foreign earned income
- Your investment income must be less than $3,300
- You must have earned income
Qualifying child for earned income purposes
For your child to qualify for earned income credit, the following qualifications must be met:
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The child and/or children must pass the following tests:
- Relationship test: the child must be your son, daughter, step child or descendent of any of them. Also your brother, sister and their dependent could be a qualifying child
- Age test: under the age of 19 or student under age 24
- Residency test: the child must leave with you in the United States for more than half the year.
- Joint return tests: the child must not file a joined return
A child cannot be used by more than one person nor can you be a qualified child to another taxpayer.
This article has described 3 ways having children can help reduce your taxes. If you have any questions or need clarification, leave a message below.