Tuesday, February 05, 2008

How Children Can Cause Taxes To Increase Sharply

Growing children can significantly increase tax liability even though one's income and withholding have not changed. It is important to be aware of how of age of one's children affects tax credits and dependent claims. Otherwise, one could have an unpleasant surprise when doing a tax return. Here are some ages that will affect federal tax liability:

  1. Your child turns 13. From birth until 13, a tax credit of between $600 to $1050 per child (2 children maximum) can be taken for up to $3000 spent for child care, to enable the parents to work, go to school or if a parent is disabled. At 13, a child is no longer eligible for this credit.
  2. Your child turns 17. Currently, taxpayers with low to moderate income can claim up to $1000 tax credit for each child under 17. The tax credit begins phasing in at $11,750 and begins phasing out at $110,000. However, in the year that a child turns 17, they are no longer eligible for the child tax credit. It can be quite a shock to owe $1000 more than the previous year when nothing else has changed.
  3. You child turns 19, earns over $3,400 and is not a full time student. At 19, the child earning over $3,400 can no longer be claimed as a dependent, even if they live full time with the parents. The resulting a loss of one exemption can increase taxes from $340 to $952 if one is in the 10% to 28% tax bracket.
  4. Your child, who is a full time student, turns 24 and earns over $3400. Same results as #2.

If one's child is near these ages, it can be helpful to assess the impact of losing either a tax credit or exemption. This can help one take action, such as increasing one's withholding early in the year, to minimize (or eliminate) the amount owed the IRS on April 15.

For more on Ideas You Can Use , check back every Tuesdayfor a new segment.

This is not financial or tax advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

1 comment:

JHS said...

Good morning:

Thanks for contributing this post to this week’s Carnival of Family life, hosted at Health Plans Plus!

Be sure to stop by the Carnival tomorrow and check out the other wonderful entries!