Day camps are common during the summer months. Many parents pay for them for their children while they work or look for work. If this applies to you, your costs may qualify for a federal tax credit that con lower your taxes. Here are the top ten tips to know about the Child and Dependent Care Credit:
1. Care for Qualifying Persons. Your expenses must be for the care of one or more qualifying person. Your dependent child or children under age 13 usually qualify. For more about this rule, see Publication 503, Child and Dependent Care Expenses.
2. Work-related Expenses. Your expenses for care must be work-related. This means that you must pay for the care so you can work or look for work. This rule also applies to your spouse if you file a joint return. Your spouse meets this rule during any month they are a full-time student. They also meet it if they're physically or mentally incapable of self-care.
3. Earned Income Required. You must have earned income, such as from wages, salaries and tips. It also includes net earnings from self-employment. Your spouse must also have earned income if you file jointly. Your spouse is treated as having earned income for any month that they are a full-time student or incapable of self-care. This rule also applies to you if you file a joint return. Refer to Publication 503 for more details.
4. Joint Return if Married. Generally, married couples must file a joint return. You can still take the credit, however, if you are legally separated or living apart from your spouse.
5. Type of Care. You may qualify for it whether your pay for care at home, at a daycare facility or at a day camp.
6. Credit Amount. The credit is worth between 20 and 35 percent of your allowable expenses. The percentage depends on the amount of your income.
7. Expense Limits. The total expense that you can use in a year is limited. The limit is $3,000 for one qualifying person or $6,000 for two or more.
8. Certain Care Does Not Qualify. You may not include the cost of certain types of care for the tax credit, including:
9. Keep Records and Receipts. Keep all your receipts and records for when you file your tax return next year. You will need the name, address and taxpayer identification number of the care provider. You must report this information when you claim the credit on Form 2441, Child and Dependent Care Expenses.
10. Dependent Care Benefits. Special rules apply if you get dependent care benefits from your employer. Se Publication 503 for more on this topic.
Remember that this credit is not just a summer tax benefit. You may be able to claim it for qualifying care that you pay for at any time during the year.
The Child and Dependent Care Tax Credit can reduce the taxes you pay. If you paid someone to care for a person in your household last year while you worked or looked for work, then read on for 10 facts from the IRS about this important tax credit:
1. Child, Dependent or Spouse. You may be able to claim the credit if you paid someone to care for your child, dependent or spouse last year.
2. Work-Related Expense. The care must have been necessary so you could work or look for work. If you are married, the care also must have been necessary so your spouse could work or look for work. This rule does not apply if your spouse was disabled or a full-time student.
3. Qualifying Person. The care must have been for “qualifying persons.” A qualifying person can be your child under age 13. A qualifying person can also be your spouse or dependent who lived with you for more than half the year and is physically or mentally incapable of self-care.
4. Earned Income. You must have earned income for the year, such as wages from a job. If you are married and file a joint tax return, your spouse must also have earned income. Special rules apply to a spouse who is a student or disabled.
5. Credit Percentage / Expense Limits. The credit is worth between 20 and 35 percent of your allowable expenses. The percentage depends on the amount of your income. Your allowable expenses are limited to $3,000 if you paid for the care of one qualifying person. The limit is $6,000 if you paid for the care of two or more.
6. Dependent Care Benefits. If your employer gives you dependent care benefits, special rules apply. For more on these rules see Form 2441, Child and Dependent Care Expenses.
7. Qualifying Person’s SSN. You must include the Social Security Number of each qualifying person to claim the credit.
8. Care Provider Information. You must include the name, address and taxpayer identification number of your care provider on your tax return.
9. Form 2441. You file Form 2441 with your tax return to claim the credit.
You normally must pay income tax on your investment income. That is also true for a child who must file a federal tax return. If a child can’t file his or her own return, their parent or guardian is normally responsible for filing their tax return.
Special tax rules apply to certain children with investment income. Those rules may affect the tax rate and the way you report the income.
Here are four facts from the IRS that you should know about your child’s investment income:
1. Investment income normally includes interest, dividends and capital gains. It also includes other unearned income, such as from a trust.
2. Special rules apply if your child's total investment income is more than $2,000. Your tax rate may apply to part of that income instead of your child's tax rate.
3. If your child's total interest and dividend income was less than $10,000 in 2013, you may be able to include the income on your tax return. If you make this choice, the child does not file a return. See Form 8814, Parents' Election to Report Child's Interest and Dividends.
4. Children whose investment income was $10,000 or more in 2013 must file their own tax return. File Form 8615, Tax for Certain Children Who Have Investment Income, along with the child’s federal tax return.
Starting in 2013, a child whose tax is figured on Form 8615 may be subject to the Net Investment Income Tax. NIIT is a 3.8% tax on the lesser of either net investment income or the excess of the child's modified adjusted gross income that is over a threshold amount. Use Form 8960, Net Investment Income Tax, to figure this tax. For more on this topic, visit IRS.gov.
There are a few tax rules that affect everyone who files a federal income tax return. This includes the rules for dependents and exemptions. The IRS has seven facts on these rules to help you file your taxes.
1. Exemptions cut income There are two types of exemptions: personal exemptions and exemptions for dependents. You can usually deduct $3,900 for each exemption you claim on your 2013 tax return.
2. Personal exemptions You can usually claim an exemption for yourself. If you’re married and file a joint return you can also claim one for your spouse. If you file a separate return, you can claim an exemption for your spouse only if your spouse had no gross income, is not filing a return, and was not the dependent of another taxpayer.
3. Exemptions for dependents You can usually claim an exemption for each of your dependents. A dependent is either your child or a relative that meets certain tests. You can’t claim your spouse as a dependent. You must list the Social Security number of each dependent you claim. See IRS Publication 501, Exemptions, Standard Deduction, and Filing Information, for rules that apply to people who don’t have an SSN.
4. Some people don’t qualify You generally may not claim married persons as dependents if they file a joint return with their spouse. There are some exceptions to this rule.
5. Dependents may have to file People that you can claim as your dependent may have to file their own federal tax return. This depends on many things, including the amount of their income, their marital status and if they owe certain taxes.
6. No exemption on dependent’s return If you can claim a person as a dependent, that person can’t claim a personal exemption on his or her own tax return. This is true even if you don’t actually claim that person as a dependent on your tax return. The rule applies because you have to right to claim that person.
7. Exemption phase-out The $3,900 per exemption is subject to income limits. This rule may reduce or eliminate the amount depending on your income. See Publication 501 for details.
The Child Tax Credit May Cut Your Tax
If you have a child under age 17, the Child Tax Credit may save you money at tax time. Here are some key facts the IRS wants you to know about the credit.
• Amount. The non-refundable Child Tax Credit may help cut your federal income tax by up to $1,000 for each qualifying child you claim on your tax return.
• Qualifications. A child must pass seven tests to qualify for this credit:
1. Age test. The child was under age 17 at the end of 2013.
2. Relationship test. The child is your son, daughter, stepchild, foster child, brother, sister, stepbrother, or stepsister. A child can also be a descendant of any of these persons. For example, your grandchild, niece or nephew will meet this test. Adopted children also qualify. An adopted child includes a child lawfully placed with you for legal adoption.
3. Support test. The child did not provide more than half of his or her own support for 2013.
4. Dependent test. You claim the child as a dependent on your 2013 federal income tax return.
5. Joint return test. A married child can’t file a joint return with their spouse they are filing jointly only to claim a tax refund.
6. Citizenship test. The child must be a U.S. citizen, U.S. national or U.S. resident alien. For more see Publication 519, U.S. Tax Guide for Aliens.
7. Residence test. In most cases, the child must have lived with you for more than half of 2013.
• Limitations. Your filing status and income may reduce or eliminate the credit.
• Additional Child Tax Credit. If you get less than the full Child Tax Credit, you may qualify for the refundable Additional Child Tax Credit. This means you could get a refund even if you owe no tax.
• Schedule 8812. If you qualify to claim the Child Tax Credit, make sure to check whether you must file Schedule 8812, Child Tax Credit, with your return. If you qualify to claim the Additional Child Tax Credit, you must complete and attach Schedule 8812.
• Interactive Tax Assistant Tool. You can use the ITA tool at IRS.gov to see if you can claim the credit. The tool can answer many of your tax questions.
Eight Tax Savers for Parents
Your children may help you qualify for valuable tax benefits. Here are eight tax benefits parents should look out for when filing their federal tax returns this year.
1. Dependents In most cases, you can claim your child as a dependent. This applies even if your child was born anytime in 2013. For more details, see Publication 501, Exemptions, Standard Deduction and Filing Information.
2. Child Tax Credit You may be able to claim the Child Tax Credit for each of your qualifying children under the age of 17 at the end of 2013. The maximum credit is $1,000 per child. If you get less than the full amount of the credit, you may be eligible for the Additional Child Tax Credit. For more about both credits, see the instructions for Schedule 8812, Child Tax Credit, and Publication 972, Child Tax Credit.
3. Child and Dependent Care Credit You may be able to claim this credit if you paid someone to care for one or more qualifying persons. Your dependent child or children under age 13 are among those who are qualified. You must have paid for care so you could work or look for work. For more, see Publication 503, Child and Dependent Care Expenses.
4. Earned Income Tax Credit If you worked but earned less than $51,567 last year, you may qualify for EITC. If you have three qualifying children, you may get up to $6,044 as EITC when you file and claim it on your tax return. Use the EITC Assistant tool at IRS.gov to find out if you qualify or see Publication 596, Earned Income Tax Credit.
5. Adoption Credit You may be able to claim a tax credit for certain expenses you paid to adopt a child. For details, see the instructions for Form 8839, Qualified Adoption Expenses.
6. Higher education credits If you paid for higher education for yourself or an immediate family member, you may qualify for either of two education tax credits. Both the American Opportunity Credit and the Lifetime Learning Credit may reduce the amount of tax you owe. If the American Opportunity Credit is more than the tax you owe, you could be eligible for a refund of up to $1,000. See Publication 970, Tax Benefits for Education.
7. Student loan interest You may be able to deduct interest you paid on a qualified student loan, even if you don’t itemize deductions on your tax return. For more information, see Publication 970.
8. Self-employed health insurance deduction If you were self-employed and paid for health insurance, you may be able to deduct premiums you paid to cover your child under the Affordable Care Act. It applies to children under age 27 at the end of the year, even if not your dependent. See Notice 2010-38 for information.
Did you change your name last year? Did your dependent have a name change? If the answer to either question is yes, be sure to notify the Social Security Administration before you file your tax return with the IRS.
This is important because the name on your tax return must match SSA records. If they don’t, you’re likely to get a letter from the IRS about the mismatch. And if you expect a refund, this may delay when you’ll get it.
Be sure to contact SSA if:
You can file Form SS-5 at an SSA office or by mail. Your new card will have the same SSN as before but will show your new name.
If you have an adopted child who does not have a SSN, use a temporary Adoption Taxpayer Identification Number on your tax form. You can apply for an ATIN by filing Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions, with the IRS. Get the form on IRS.gov or by calling 800-TAX-FORM (800-829-3676).
If you are a working parent or look for work this summer, you may need to pay for the care of your child or children. These expenses may qualify for a tax credit that can reduce your federal income taxes. The Child and Dependent Care Tax Credit is available not only while school’s out for summer, but also throughout the year. Here are eight key points the IRS wants you to know about this credit.
1. You must pay for care so you – and your spouse if filing jointly – can work or actively look for work. Your spouse meets this test during any month they are full-time student, or physically or mentally incapable of self-care.
2. You must have earned income. Earned income includes earnings such as wages and self-employment. If you are married filing jointly, your spouse must also have earned income. There is an exception to this rule for a spouse who is full-time student or who is physically or mentally incapable of self-care.
3. You must pay for the care of one or more qualifying persons. Qualifying children under age 13 who you claim as a dependent meet this test. Your spouse or dependent who lived with you for more than half the year may meet this test if they are physically or mentally incapable of self-care.
4. You may qualify for the credit whether you pay for care at home, at a daycare facility outside the home or at a day camp. If you pay for care in your home, you may be a household employer. For more information, see Publication 926, Household Employer's Tax Guide.
5. The credit is a percentage of the qualified expenses you pay for the care of a qualifying person. It can be up to 35 percent of your expenses, depending on your income.
6. You may use up to $3,000 of the unreimbursed expenses you pay in a year for one qualifying person or $6,000 for two or more qualifying person.
7. Expenses for overnight camps or summer school tutoring do not qualify. You cannot include the cost of care provided by your spouse or a person you can claim as your dependent. If you get dependent care benefits from your employer, special rules apply.
8. Keep your receipts and records to use when you file your 2013 tax return next year. Make sure to note the name, address and Social Security number or employer identification number of the care provider. You must report this information when you claim the credit on your return.
Adoption can create new families or expand existing ones. The expenses of adopting a child may also lower your federal tax. If you recently adopted or attempted to adopt a child, you may be eligible for a tax credit. You may also be eligible to exclude some of your income from tax. Here are ten things the IRS wants you to know about adoption tax benefits.
1. The maximum adoption tax credit and exclusion for 2012 is $12,650 per eligible child.
2. To be eligible, a child must generally be under 18 years old. There is an exception to this rule for children who are physically or mentally unable to care for themselves.
3. For 2012, the tax credit is nonrefundable. This means that, while the credit may reduce your tax to zero, you cannot receive any additional amount in the form of a refund.
4. If your credit exceeds your tax, you may be able to carry forward the unused credit. This means that if you have an unused credit amount in 2012, you can use it to reduce your taxes for 2013. You can carryover an unused credit for up to five years or until you fully use the credit, whichever comes first.
5. Use Form 8839, Qualified Adoption Expenses, to claim the adoption credit and exclusion. Although you cannot file your tax return with Form 8839 electronically, the IRS encourages you to use e-file software to prepare your return. E-file makes tax preparation easier and accurate. You can then print and mail your paper federal tax return to the IRS.
6. Adoption expenses must directly relate to the legal adoption of the child and they must be reasonable and necessary. Expenses that qualify include adoption fees, court costs, attorney fees and travel costs.
7. If you adopted an eligible U.S. child with special needs and the adoption is final, a special rule applies. You may be able to take the tax credit even if you did not pay any qualified adoption expenses. See the instructions for Form 8839 for more information about this rule.
8. If your employer has a written qualified adoption assistance program, you may be eligible to exclude some of your income from tax.
9. Depending on the adoption’s cost, you may be able to claim both the tax credit and the exclusion. However, you cannot claim both a credit and exclusion for the same expenses. This rule prevents you from claiming both tax benefits for the same expense.
10. The credit and exclusion are subject to income limitations. The limits may reduce or eliminate the amount you can claim depending on your income.
Some children receive investment income and are required to file a federal tax return. If a child cannot file his or her own tax return for any reason, such as age, the child's parent or guardian is responsible for filing a return on the child’s behalf.
There are special tax rules that affect how parents report a child’s investment income. Some parents can include their child’s investment income on their tax return. Other children may have to file their own tax return.
Here are four facts from the IRS about the taxability of your child’s investment income.
1. Investment income normally includes interest, dividends, capital gains and other unearned income, such as from a trust.
2. Special rules apply if your child's total investment income is more than $1,900. The parent’s tax rate may apply to part of that income instead of the child's tax rate.
3. If your child's total interest and dividend income is less than $9,500, you may be able to include the income on your tax return. See Form 8814, Parents' Election to Report Child's Interest and Dividends. If you make this choice, the child does not file a return.
4. Your child must file their own tax return if they received investment income of $9,500 or more. File Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900, with the child’s federal tax return.