January 27, 2010 // Franchising.com // (Virginia Beach, VA) From the cradle to college, children's lives greatly impact the tax situations of their families. Liberty Tax Service advises you any child born on December 31st of 2009 or before can be claimed for the entire year of 2009.
"Also, on a positive tax note, hiring your children as employees in a small business can be advantageous tax-wise," said John Hewitt, CEO and Founder of Liberty Tax Service.
Children who are under age 18 at the end of the year will continue to be taxed at the parent's tax rate. This taxing of investment income at the parent's tax rate will also apply to a child aged 18 at the end of the year or to a child who was a full-time student, over age 18 and under age 24 at the end of the year, when the child did not have earned income that was more than half of the child's support. If the child's interest, dividends, and other investment income total more then $1,900, part of that income may be taxed at the parent's tax rate instead of at the child's tax rate.
For each qualifying child, you can claim a dependent's exemption of $3,650. Children who are working cannot claim their own exemptions if they qualify to be claimed as a dependent on the parent's return.
More people may be eligible to claim the child tax credit in 2010. The additional child tax credit on Form 8812 is refundable to the extent of 15% of the taxpayer's earned income in excess of $3,000. A qualifying child must be under 17, a son, daughter, stepchild, eligible foster child who is a dependent, brother, sister, stepbrother, stepsister, or descendent of one of them (including grandchild, niece and nephew). This credit is nonrefundable, and can only reduce the taxpayer's income tax.
A refundable additional child tax credit may be available to those who qualify and have not used up the available amount. A military taxpayer's nontaxable combat pay is added to the earned income which may give a larger credit. The percentage used to determine the credit is 15% of the earned income amount over $3,000.
A credit for up to 35% of qualified child and dependent care expenses paid is available for taxpayers who pay childcare in order to go to work. Qualified expenses may be allowed for up to $3,000 for one eligible individual ($6,000 for two or more). Persons employed or looking for work who must pay someone to care for dependents under age 13 or for a qualified disabled person may also be able to take this credit.
The earned income credit amounts will be temporarily increased for working families with three or more children. This increases the earned income tax credit to forty-five percent of the family's first $12,570 of earned income for families with three or more children, and increases the beginning point of the phase-out range for all married couples filing a joint return (regardless of the number of children) by $1,880.
Qualifying higher education expenses such as tuition and fees you paid for yourself, a spouse, or a dependent may be deductible. The taxpayer cannot claim both this deduction and the American Opportunity, (formerly Hope credit) or lifetime learning credit for the same student in the same year. This deduction is currently available through December 31, 2009.
The new American Opportunity Credit modifies the Hope credit by making it available to more taxpayers. The credit now covers the cost of required course materials, and extends the time a student can claim it from two years to four. The credit will allow up to $2,500 of the cost of college tuition and related expenses. Forty percent of that credit will be refundable. The amount of credit for the American Opportunity Credit, (expanded Hope credit) will be reduced for taxpayers whose modified adjusted gross income is between $80,000 to $90,000 (between $160,000 and $180,000 for married filing jointly).
The lifetime learning credit gives a credit of 20% of qualified educational expenses not exceeding $10,000, for a maximum credit of $2,000. The amount of credit will be reduced for taxpayers whose modified adjusted gross income is between $50,000 to $60,000 (between $100,000 and $120,000 for married filing jointly).
More college expenses are allowed with 529 plans. Computers and computer technology will be allowed as qualified purchases paid by 529 college savings plans.
The maximum adoption credit and exclusion amount is $12,170. This is also the maximum exclusion from income under an employer's adoption assistance program. The full credit will be allowed for adopting a special needs child, regardless of whether the taxpayer has qualifying expenses. This is subject to phase-out modified adjusted gross income limits of between $182,180 and $222,180
A child employed by a parent is exempt from having FICA withheld from his or her income until age 18 and exempt from the parent's paying FUTA until age 21. The child must be a bona-fide employee of the parent-owned business. It's important to document the child's hours, nature of their work, and wages earned with weekly timesheets and the child must be issued a Form W-2.