TAX BREAKS PARENTS CAN'T AFFORD TO OVERLOOK
Michigan Credit Union League - Your Money Matters
Starting this year, Uncle Sam is giving families with children more credit - tax credit, that is. A new child credit is available to parents with children 16 years of age or younger in 1998.
With the passage of the 1997 Taxpayer Relief Act, taxpayers will receive a $400 credit per qualifying child for tax years beginning in 1998. The credit increases to $500 per child for tax years beginning in 1999 and beyond.
According to the Michigan Association of Certified Public Accountants (MACPA), this credit is on top of the dependency exemption and in addition to the dependent care credit which helps working parents defray the cost of child care.
CHILD CREDIT SAVES TAX DOLLARS
To be eligible for the child credit, a qualifying child must be 16 years of age or younger at the end of the year and must qualify as your dependent. The credit is first available for the 1998 tax year, which means it can be claimed on the tax return you file in 1999. The child credit applies to each qualifying child, so for example, a family with three children 16 years old or younger can take a $1,200 tax credit on their 1998 tax return.
The child credit is phased out for married taxpayers filing jointly with adjusted gross incomes (AGI) between $110,000 and $120,000, and for singles taxpayers or heads of household with AGIs between $75,000 and $85,000.
Here's how it works. The credit is reduced $50 for each $1,000 of AGI over the $110,000 threshold for married, joint-filing taxpayers ($75,000 for taxpayers who file as single). For example, if you're married and your AGI is $115,000, your child credit is reduced by $250 ($50 for each thousand over $110,000) to $150. The credit disappears completely when the AGI reaches $120,000 for joint filers and $85,000 for single filers.
If you expect to take the child care credit, you may want to file a new W-4 Form with your employer in order to claim one more extra withholding allowance. That way, you can enjoy the extra take-home pay now, rather than waiting until next year to receive the benefit.
DEPENDENT CARE CREDIT HELPS WORKING PARENTS
A tax credit you may be able to claim on your 1997 tax return is child and dependent care expenses incurred so that you can work. To qualify, the child care expenses you paid must be necessary for you to work outside the home or to actively seek employment, and the care must be for the child's protection and well-being. The care may be provided at a day care center, babysitter's home, nursery school, day camp or at home. If the care is provided in your home, money you pay for additional domestic services such as cooking, cleaning and other household duties qualify only if the work is done partly for the care and well-being of your child.
To qualify for the credit in 1997, your child must have been under the age of 13 and generally, you must be able to claim the child as your dependent. Other special-needs individuals, including spouses, may also qualify. If your child turned 13 during the year, you may take a tax credit for those expenses incurred before the child's 13th birthday.
You may not take a credit for child care expenses you paid to someone who is your dependent, or to your child under 19. For example, expenses you paid to your 16-year-old daughter for babysitting your toddler would not be eligible for the child care tax credit. You could, however, claim a credit for money you paid your mother-in-law to care for your child, as long as you don't claim your mother-in-law as a dependent.
The credit applies only to child care expenses of up to $2,400 for one qualifying child, or $4,800 for two or more qualifying children. The tax credit ranges from 20 percent to 30 percent of child care expenses, depending on your AGI. If your AGI was $10,000 or less in 1997, you may claim the maximum percentage rate of 30 percent of qualified expenses. If your AGI falls between $10,000 and $28,000, the 30 percent credit is reduced by one percent for each $2,000 of AGI in excess of $10,000. Taxpayers with AGI over $28,000 are limited to a credit for 20 percent of their child care expenses.
CPAs point out that if your participate in a dependent care assistance program sponsored by your employer, you must reduce the amount of expenses eligible for the credit by the amount excluded from your gross income under the plan. If you think you'd be eligible to claim the child care credit in 1998, determine whether you get a greater tax benefit by claiming the credit or using your employer's dependent care program.