For 2013, the U.S. Department of Health and Human Services (HHS) estimated that the basic cost of raising a child in the U.S. was $4,020 yearly, which can be quite taxing for single parents and individuals with low income, particularly in cases where families have more than one child. The U.S Internal Revenue Service (IRS) provides some relief to these parents in the form of tax credits and deductions.[i]
Based on a recently released IRS list of claimable tax credits by parent(s) taxpayers, AG Tax analysts have summarized the details of a few beneficial tax credits for ‘qualifying children’ to consider in this and future tax seasons.
Qualifying Child as Per I.R.S.[ii]
- The child should be related to the taxpayer either by blood, through adoption, as a stepchild, or belonging to the family lineage (siblings’ child/children)
- The taxpayer and the child should share a common residence for at least 6 months, other than if the parents are divorced, separated, or some other uncommon but eligible situations.
- The child must be younger than the taxpayer.
- The child should be below the age of 19, or under 24 if he/she is still finishing off with their studies with no part-time employment, or any age if the child is permanently and totally disabled at any time during in the year.
- The child did not provide more than half of his/her own support for the year.
Tax Credits
Dependents
The IRS allows parent(s) to claim their children as ‘dependents’ when filing tax returns, provided the child(ren) has/have been residing with the taxpayer for more than 6 months (half a year). Dependents must meet a nationality test proving to be a U.S. citizen or national, or a resident of U.S. or Canada or Mexico, with an exception for certain adopted children. For every qualified dependent an additional exemption amount of $3,900 can be claimed in the individual’s 2013 taxable income. However, there are certain rules to be followed while claiming dependents, such as: only one parent is allowed to claim a child as deduction if the return is not filed jointly. Therefore, it is best to consult a tax practitioner to ensure dependents are claimed properly between spouses.[iii]
Child Tax Credit
Parents can claim a ‘Child Tax Credit’ up to $1,000 per child on their tax return for every qualifying child, provided the child(ren) is/are below 17 years of age and are a U.S. citizen, national, or resident alien. If the child is a resident alien they must have an ITIN, be present in the U.S., and meet the substantial presence test.[iv]
Additional Child Tax Credit
If for some reason a taxpayer cannot claim the full child tax credit, he/she may be able to obtain the ‘Additional Child Tax Credit’, equal to the ‘not allowed child tax credit’ amount, or ‘15% of the earned income above $3,000 (whichever is lesser) if the earned income is within certain limits ($110,000: Married filing jointly; $75,000: Single/ Head of Household, or qualifying widow(er); $55,000: Married filing separately).[v]
Child and Dependent Care Credit
A taxpayer may be able to claim the ‘child and dependent care credit’, equal to a percentage of the expenses incurred (depending on the Adjusted Gross Income), or up to $3,000 for one qualifying individual ($6,000 for two or more qualifying individuals) after adjusting the employer-provided dependent care benefit (maximum $5,000) to apply to childcare while the taxpayer is working or busy looking for work.[vi]
Adoption Credit
Taxpayers who have adopted children and incurred out of pocket expenses such as adoption fees, lawyer fees, or any travelling and lodging expenses related to the adoption, may be able to claim the adoption credit up to $12,970 for the 2013 tax year, and $13,190 for 2014 for these expenses excluding any assistance provided by the taxpayer’s employer. However, this does not cover adopting the child/children of a spouse[vii]
Earned Income Tax Credit (EITC)
A married couple with (a) child(ren) filing their taxes jointly and earning equal to or less than the threshold limit ($51,567 for 2013) may qualify for the EITC.[viii]
American Opportunity & Lifetime Learning Education Credits
A taxpayer can claim education tax credits (American Opportunity Credit and the Lifetime Learning Credit) for higher education costs paid for by oneself, or by a direct family member.[ix]
Student Loan Interest Deduction
Depending on the Modified Adjusted Gross Income Phase-out Limit (For 2014: Married Filing Jointly $130,000-160,000; Qualifying Widow(er)/Head of Household/Single: $65,000-$80,000) taxpayers may be able to claim up to $2,500 on the interest payments of a student loan taken by the taxpayer for themselves, spouse, or family member.[x]
Self-Employed Health Insurance Deduction
Under the Affordable Care Act, the IRS allows self-employed taxpayers to claim an ‘above the line’ deduction for the entire insurance cost purchased for themselves, their spouse and dependent, or independent children below age 27, provided there are no group insurance policies available at subsidized cost from the taxpayer’s or spouse’s employer[xi]
AG Tax LLP Can Help
Tax laws are complex, and one tax strategy may not work for everyone, therefore it is highly recommended to consult a tax professional regarding any credit/deductions to be claimed or any other tax situation, since only a tax professional can provide the right guidance regarding tax matters.
If you have any tax-related concerns or need assistance with tax planning or filings, please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian personal, corporate, and estate tax laws and can guide you with your tax situation.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canada, and other international tax laws. We can assist with:
• Canadian Personal and Corporate tax returns
• Cross Border Taxation and Business Planning
• U.S. Personal and Corporate Taxation
• Disclosure of Foreign Assets and other information filings
• Retirement planning
• Estate Planning, Inheritance tax advice
Please contact any of our offices across Canada at 604-538-8735 (Greater Vancouver), 780-702-2732 (Edmonton and Alberta), or 416-238-5920 (Greater Toronto) to arrange for an appointment to discuss your tax related queries.
IRS Circular 230 Disclaimer: Please note that this document is to be considered other written advice. Any tax advice in this document was not intended or written to be used, and cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer under the Internal Revenue Code or applicable state or local tax law provisions.
Furthermore, the information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
[i] http://aspe.hhs.gov/poverty/13poverty.cfm, http://en.wikipedia.org/wiki/Cost_of_raising_a_child
[ii] http://www.irs.gov/uac/A-%E2%80%9CQualifying-Child%E2%80%9D
[iii] http://www.irs.gov/publications/p501/ar01.html, http://www.irs.gov/pub/irs-pdf/p501.pdf, http://taxes.about.com/od/dependents/a/Dependents.htm, https://turbotax.intuit.com/tax-tools/tax-tips/Family/Rules-for-Claiming-a-Dependent-on-Your-Tax-Return/INF12139.html
[iv] http://www.irs.gov/pub/irs-pdf/p972.pdf, http://www.irs.gov/uac/Form-8812,-Additional-Child-Tax-Credit, http://taxes.about.com/od/deductionscredits/qt/childtaxcredit.htm
[v] https://www.1040.com/federal-taxes/credits/additional-child-tax-credit/
[vi] http://www.irs.gov/pub/irs-pdf/p503.pdf, http://www.irs.gov/publications/p503/, http://www.investopedia.com/terms/i/irs-pub-503.asp, http://www.irs.gov/taxtopics/tc602.html
[vii] http://www.irs.gov/instructions/i8839/, http://www.irs.gov/uac/Form-8839,-Qualified-Adoption-Expenses, http://www.irs.gov/taxtopics/tc607.html
[viii] http://www.irs.gov/pub/irs-pdf/p596.pdf, http://www.irs.gov/Individuals/Preview-of-2012-EITC-Income-Limits,-Maximum-Credit–Amounts-and-Tax-Law-Updates
[ix] http://www.irs.gov/pub/irs-pdf/p970.pdf, http://www.irs.gov/publications/p970/ar01.html
[x] http://www.irs.gov/pub/irs-pdf/p970.pdf; http://taxes.about.com/od/deductionscredits/qt/studentloanint.htm
[xi] http://insight.aon.com/?elqPURLPage=5913, http://www.irs.gov/pub/irs-drop/n-10-38.pdf, http://taxes.about.com/od/deductionscredits/qt/healthinsurance.htm