INDIVIDUAL TAX PLANNING June 2020

I WON’T KID YOU!


Raising children is expensive! You cannot afford to overlook tax breaks. Here are some of my favorites. There are $2,000 and $500 child credits. There is a child-care credit for up to $600 per child up to $1,200. Tax credits reduce taxes dollar for dollar. The rules are complex. I have a surprise or two for you.
CHILD CREDITS. There is a $2,000 child credit for parents of a “qualified child,” replacing the previous $4,000 deduction for dependents. In addition, there is a $500 credit for “qualified relatives.” The credit phases out if you have “modified adjusted gross income’ exceeding $400,000 for married filing jointly and $200,000 for other statuses. These rules are simplified so do not act upon them without advice.

QUALIFYING CHILD: entitles parents to a $2,500 credit.

  1. your legal child, stepchild, or foster child,
  2. under 19 or under 24 and a full-time student.,
  3. provided not more than half of his or her support,
  4. claimed as a dependent on your tax return,
  5. lived with you in the U.S. for more than half the year,
  6. a U.S. citizen, and

QUALIFYING RELATIVE. A qualifying relative entitles parents to a $500 credit.

  1. who is not a qualifying child?
  2. a household member who is a close relatives or in-laws or certain others.
  3. who made less than $4,200 in gross income in 2019 (the former deduction for a dependent).
  4. is one for whom you provided more than half of the total support during the year.
    For exhaustive information, see IRS Publication 501

DEPENDENT CARE CREDIT

The dependent care credit is a valuable tax benefit for parents, up to $1,200 (20% of qualifying expenses). This credit applies to expenses for the well-being and protection of your child that are necessary for the gainful employment of the parents. Here are some requirements.

To qualify: (1) Must be your qualifying child who is your dependent and who was under age 13. The expenses must be for that person’s care. (2) You must share your principal residence with the qualifying persons. (3) You must pay the expenses so that you and your spouse can work, and each must have income from work that year. (4) Your expenses may not be paid to someone you can claim as a dependent. If you are married, you must file a joint return. (5) Necessary household services qualify like the services of a housekeeper, maid, or cook but not the services of a chauffeur, bartender, or gardener.

NOT qualifying are amounts for food, lodging, clothing, education, and entertainment. Education means kindergarten or a higher grade but does not include before or after-school care.

Amount limits. The qualifying expenses are limited to the lower of a dollar limit and an earned income limit. The dollar limit is $3,000 for the first q ($6,000 for two or more qualifying persons). The earned income is the smaller of your or your spouse’s earned income for the year. The credit is 20% of qualifying expenses, so it can be up t o $1,200
TIP: A qualifying child’s Summer day camp costs qualify for the dependent care credit including day camps for sports, computers, math, theater or just for fun, and includes camps to help improve reading or study skills. Not qualifying are overnight camps, summer school, and tutoring.
This article is oversimplified and before you try to apply it, I suggest that you ask a professional. Here are a mere 20 pages or so that the IRS has provided of guidance in IRS Publication 503 Child and Dependent Care Expenses.

About Wis Laughlin

I help clients with tax preparation and IRS representation, estate planning, and complex contracts, including LLC's. As a former IRS tax attorney in their National Office. Law.com picked Wis in 2017 and several prior years as one of the Top Tax and Estate Lawyers in Tennessee. I am your advocate, not your accountant. I don't tell you what you can't do. I show you how to do it.
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