Thinking of having kids? Already have kids? Did you know that your kids should be showing up on your tax forms? Many parents already know that they should list their children as dependents in order to get more money (and many parents rightly deserve a bonus for their bundle of joy and insanity). The details between children and taxes may fluctuate from year to year, but the basics have essentially remained the same.
When you have children, you can get a tax credit as long as that child is living with you and under the age of 17. Your modified gross income has to be at a specific amount depending upon your current situation, such as whether you are married and filing jointly, single, or married and filing separately. Because the economy is constantly changing, as well as a potential hike in minimum wage looming ever closer, the total income may change come tax season next year. The tax credit you get has been changing too due to the Economic Growth and Tax Relief Reconciliation Act of 2001. From 2001 to 2004, a parent was eligible for a $600 return per child. Currently it is $700, and within the next two years it will jump another $300.
Not only does your child have to be under 17, living with you, and claimed as a dependent, but he or she must also be related to you either by blood or officially, such as a stepchild or adopted child. The child must also be a citizen, national, or a resident of the United States to be eligible. This includes having a Social Security Number or some kind of tax identification number. If you and your child meet all the requirements, you fill out a few lines on the form you use (1040, 1040A, or 1040EZ), and your credit is ready to go. A tax credit is also much more valuable than a tax deduction because a deduction only takes out a certain amount from your total taxable income whereas a credit reduces your total tax.
Children also have to deal with taxes if they have any income. Small enough amounts can be ignored and there is no need for them to file. However, once they make enough money, filing is more important. There is also the so-called kiddie tax that you may have to worry about. The kidde tax is paid when your child has an income that can be taxed and he or she still lives at you. Basically, they are taxed at your rate instead. If your child makes over $1,700 he or she is subject to this tax. The less than great news is that the kiddie tax will have a qualifying age of 23 in 2008. If your child is under 23, makes over $1,700, and does not file a joint return. It does not matter whether or not the child is still a dependent.
Taxes can be tricky and annoying. Still, there may be ways of lessening the impact extra taxes may make on you, just make sure not to fall into any tax scam traps in trying to save a little extra money.
