Posted on January 14th, 2010

Tax season is fast approaching. If you haven’t yet started to think about preparing your taxes yet, you will soon. We all want to make sure we’re taking all of the deductions applicable to us, but we fear the dreaded IRS audit. Since we’re certainly not CPAs, we asked our friends HESS & HESS CPA’s, P.A. to share with us the top five things parents should know about taxes. Here is what they had to say:

Child tax credit (for having a dependent child)
Taxpayers with qualifying children under age 17 are generally entitled to a child tax credit in the amount of $1,000 per child. (The credit amount per child is scheduled to revert to $500 after 2010.) The credit phases out when a taxpayer’s modified adjusted gross income exceeds $110,000 for married filing together and $55,000 for single parents.

Child care tax credit (for using daycare)
A nonrefundable credit is available to taxpayers who pay childcare expenses to allow the parents to work. The credit generally equals 20% of the expenses of the lesser of (1) the amount of qualifying childcare expenses, limited to a maximum of $3,000 for one qualifying child or $6,000 for two or more qualifying children, or (2) the taxpayer’s earned income (or spouse’s earned income if less). Keep in mind, married couples wanting to claim the credit must file a joint return.

College tax credit
The American Opportunity Tax Credit (formerly called the Hope Credit) is a per student credit that may be claimed for each individual who, for at least one academic period that begins during the tax year, is enrolled in a post-secondary degree, certificate, or other program leading to a recognized post-secondary educational credential at an eligible educational institution and is enrolled at least half-time. The maximum credit is $2,500 per student and is based on 100% of the first $2,000 spent plus 25% of the next $2,000 spent on qualified tuition and related expenses paid during the tax year for education.

The Lifetime Learning Credit, unlike the American Opportunity Tax Credit, is a per taxpayer (per tax return) credit, rather than a per student credit. The credit can be used for non-half-time students and covers a much broader range of courses that do not have to lead to a credential. You may claim a maximum Lifetime Learning Credit of $2,000 per each year and it’s calculated by taking 20% of up to $10,000 of the aggregate qualified tuition and related expenses paid during the tax year for education furnished to an eligible student.

Saving for college
Although there are not any plans that allow the parent to defer taxable income to save for college, there are plans that allow you to put away money for the child now and take it out, along with all of the earnings, tax free as long as the money is used for education. There are a lot of options, so be sure to ask your CPA for help deciding what best fits your needs. This is a great conversation to have while you are having your taxes done this year.

When does your child need to file a tax return?
Whether or not your child (whom you claim as your dependent) needs to file a tax return depends on two main factors: how much income they received during the year and what type of income was received.

Generally, if your child’s only source of income was unearned (most commonly from interest and dividends) and is less than $950, they should not need to file a return. If the unearned income is $950 or more, the income must be reported by either filing a separate return for the child, or by including the income in your tax return by attaching Form 8814. In a case where a child has unearned income in excess of $1,900, the first $950 is not taxable, the second $950 is taxed at the child’s rate and any excess income is taxed at the parent’s rate (commonly known as kiddie tax). If you choose to file a separate return for your child and his unearned income exceeds $1,900, Form 8615 must be attached to the return to account for the kiddie tax.

If your child has earned income (typically from a part-time job), she should file her own return. Any earnings in excess of $5,700 will be taxable.

In cases where the child has both unearned income and earned income to report, a separate return for the child should be filed. Be sure to attach Form 8615 to the return to apply the kiddie tax rules on the unearned income portion.

This is just a taste of the murky waters we parents have to navigate when preparing our personal taxes. If you need help this year with your personal or business taxes, the folks at HESS & HESS CPA’s, P.A. (in Baldwin Park) would be happy to assist you. Be sure to tell them PLAYGROUND sent ya!