Things to know about your favorite tax deductions. (Special Advertising Section).
Here's a story about some tax law changes of which any parent or guardian should be cognizant. They include:
Child Tax Credit
The 2001 Tax Act increased the amount of the child tax credit to $1,000, over a ten-year period. For 2002 through 2004, the amount of the credit is $600. The credit increases to $700 for 2005-2008, $800 for 2009, and to $1,000 for year 2010 and beyond. Credits are the penultimate tax "bennie" for a taxpayer. The ultimate one is a deduction that reduces your adjusted gross income, or as we in the biz call it, "above the line." A credit reduces the amount of tax you have to pay, dollar-for-dollar.
Things to know:
Children must be under 17 years of age as of Dec. 31 of the year in question. Most juniors and seniors won't meet this requirement (Write your congressman! Who decided that these neophyte drivers and soon-to-be college students weren't deserving of a credit for the benefit of their parents?!)
The maximum amount of the credit cannot exceed the sum of a taxpayer's regular tax liability plus alternative minimum tax, if any, reduced by these credits: child and dependent care expense, credit for the elderly/disabled, mortgage interest credit, Hope/lifetime learning credits, and foreign tax credit. For most taxpayers, the credit phases out at a rate of $50 for every $1,000 of AGI exceeding $110,000 for joint filers, $55,000 for marrieds filing separately, or $75,000 for single and head of household filers. These thresholds are NOT indexed for inflation.
In divorce situations, whichever party is entitled to the dependency exemption will also be entitled to the child tax credit. Additionally, if a custodial parent releases the exemption to the noncustodial parent, that clears the way for the noncustodial parent to also claim the child tax credit.
Before the tax act of 2001, the child tax credit was a nonrefundable one. "Nonrefundable" means that if you don't have any tax liability, you don't get the money Refundable credits include the earned income tax credit, which pays certain employed people, even if they don't have to pay any income taxes. Now, the child tax credit is refundable for lower-income taxpayers (10% of earned income in excess of $10,000 through 2004, but in 2005 and thereafter, the percentage increases to 15%).
Child and Dependent Care Credit
This credit is separate from the child tax credit, discussed above. (In the interest of space, I will refer to this credit as the child care credit, but please realize that the discussion refers to its entire lengthy name, and is not meant to slight the treatment of other dependents.) Expenses for child care can result in a credit, but there have been changes, both to the maximum amount of child care expense used in computing the credit, and to the maximum credit amount. For tax years beginning after 2002, the maximum amount of eligible employment-related expenses has been increased from $2,400 to $3,000 (for one child) and from $4,800 to $6,000 (for two or more children). The maximum credit will increase from 30% to 35%. (There is a reduction of the credit for any taxpayer making more than a certain amount. The former threshold was $10,000; the new one is $15,000. The credit will be reduced 1% for each $2,000 of AGI above $15,000, with a maximum reduction of no more than 15%.)
New Business Credit
Finally, the 2001 act created a new business credit available in 2002 and beyond. This one is aimed at businesses. A credit for certain employer-provided child care costs will be available, in the amount of 25% of qualified expenses for employee child care and 10% of qualified expenses for child care resource and referral services. The maximum credit for a single tax year is $150,000. If you work for a business without child care facilities, this may be the time to encourage them to consider doing so.
As with any tax issues, you should consult your tax adviser, to ensure that you are maximizing your tax-saving strategies for your unique situation. The fall is an ideal time to address tax planning.
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|Title Annotation:||child tax credit, child and dependent care credit, new business credits|
|Author:||Scroggins, Lisa Flynn|
|Date:||Sep 30, 2002|
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