Tax - IRS Wants to Reward You for Parenting America's Future

The fundamental unit of American society is "the family". Therefore, it is not surprising that the federal government gives extra benefits to parents in the form exemptions and credits.

By bringing up worthy citizens of USA until they are able to take decisions of their own, the parents are contributing to the future of our nation.

Parenting is not something the government can do nor is it an easy job. The government wants to express its gratitude to the parents of this great nation by giving them special "rewards" during the tax season.

Five such parental tax benefits are:

1. The Dependent Exemption
2. Child Tax Credit and Additional Child Tax Credit
3. Tax deduction for Parental (Educational) Loan
4. Child and Dependent Care Credit
5. Earned Income Credit

Generally, the taxpayer parent claiming these tax benefits must be a U.S. citizen or resident alien for the tax year and should have Social Security Numbers.

The children should have lived with you and should have their own Social Security Numbers or Adoption Tax Identification Numbers.

The same child cannot be claimed for credits in more than one tax return.

Some of these benefits may not be available to married filing separately.

1. Dependent Exemption

Exemptions start right at the beginning of a return where each taxpayer signing the return gets one exemption. So, a single filer is given one exemption and married filing jointly get two.

When a child arrives into your family, you get one more exemption.

The maximum age limit for the child depends on whether he or she is a full time student at the end of the year:

If a full-time student, the child should be 23 years of age or under at the end of the tax year.
If not, that child should be 18 years or under.
Age restrictions do not apply in the case of disabled children.

Before 2010, this exemption was usually phased out at higher levels of income.
Due to the declining economic situation, such limits have been lifted for year 2010.

There are no special forms to complete. All that is needed is claiming the exemption against the appropriate lines in the tax return form.

2. Child Tax Credit and Additional Child Tax Credit

Eligibility for Child Tax Credit depends on the parent's filing status as well as their adjusted gross incomes and the child's age.

The child should be age 16 years or under at the end of the year.

IMPORTANT: This age limit for Child Tax Credit is lower than the age limits for children in Dependent Exemption and Earned Income Credit.

The adjusted gross income limits are as follow:

A married person filing separately: below $55,000
Single parent: below $75,000
Head of household: below $75,000
Married couples filing jointly: below $110,000

Parents who pass this income test, are allowed a credit of $1000 for each child.

Above those levels of income, the child tax credit is reduced by 5% ($50 for every $1,000) of the excess aggregated gross income and is limited to the tax liability.

A worksheet comes with the tax return to aid the parent in calculating the amount of credit.

Let us not forget that the tax liability is already reduced when you claim other credits on the tax form. So, when the phase out rules are applied, more of the excess of the credit will be lost as that balance is not refundable.

In such cases, you should see whether you are eligible for refundable "Additional Child Tax Credit" by filling Form 8812.

Additional Child Tax Credit

According to the rules of Child Tax Credit, a parent cannot be refunded the excess child credit after paying the taxes when the phase out limits are applied.

IRS tries to help some of these parents to recoup a part of that lost credit with the Additional Child Tax Credit provision:

For the tax year 2010, the excess tax credit over your tax liability is refundable to the extent of 15% of your taxable earned income in excess of $3,000.

If your earned income does not come up to $3000, there is another option for those parents having three or more qualifying children to claim the Additional Tax Credit.:

You may claim the refund if you paid Social Security taxes more than your earned income credit (EIC).

3. Deduction of Parent Loan (Student Loan) Interest Deduction

If you paid interest in 2010 on a qualified parent loan you took for your child's college education, then you may make a deduction of that interest up to a maximum of $2,500.

This interest deduction is phased out from the following levels of modified adjusted gross income (MAGI):
For single filers: $60,000
For married joint filers: $120,000

Total phase-out MAGI level beyond which this credit cannot be claimed:
Single filers: $75,000
Married joint filers: $150,000

This deduction is not possible under the following situations:

- if the parent is claimed as a dependent by somebody else's return
- if your filing status is married filing separately

There is a worksheet included in the instructions to the tax return and the calculated amount is entered against the appropriate line on the tax form.

4. Child and Dependent Care Credit

If you had to hire someone to take care of your child, you may a claim a credit for that expense.
If married, the spouse also should be working.

However, the expense should have been borne by you and not by your employer under a tax-free childcare plan.

Otherwise, the $3,000 or $6,000 limit is reduced by the tax-free benefits received from an employer's plan. Your employer will report such benefits in Form W-2.

The credit allowed is a percentage, from 20% to 35%, of such expenses incurred subject to a maximum credit of $3000 for one child and $6000 for two or more dependents.

The highest rate of 35% is for those filers with an adjusted gross income (AGI) of $15,000 or less.

Above $15,000, for every increase in AGI of $2000, the credit is reduced by 1%.

When the AGI goes above $43,000, the rate becomes fixed at 20%.

If the income is less than the $3,000 or $6,000 limit, the credit will be equal to that lower income amount.

To avail this credit the parent has to submit Form 2441, Child and Dependent Care Expenses.

5. Earned Income Credit (EIC)

This credit is also called Earned income tax credit (EITC). It is a blessing for parents who take responsibility for the education of their children.
But that doesn't mean that the child should be studying or that taxpayers without qualifying children should not claim it: only that tighter age or income restrictions apply in these latter cases.

This credit has some special requirements since it is based on Earned Income from a job or business.

It cannot be claimed if the parent's source of income is solely retirement or disability benefits or investment returns.
When the income includes both earnings and investment returns, the investment income must not exceed $3,100.

If the "Qualified Child" is a student, he or she should be 23 years of age or under at the end of the tax year.
If the child is not a student, that child should be 18 years or under
Age restrictions do not apply in the case of disabled children.

There are limits on income depending on the filing status:

IMPORTANT: Earned Income Credit is not available to filers whose status is "married filing separately."

A. WITH MORE THAN TWO QUALIFIED CHILDREN
Married filing jointly: below $48,362
Head of household: below $43,352
Single filer: below $43,352

B. WITH TWO QUALIFIED CHILDREN
Married filing jointly: below $45,373
Head of household: below $40,363
Single filer: below $40,363

C. WITH ONE QUALIFIED CHILD
Married filing jointly: below $40,545
Head of household: below $35,535
Single filer: below $35,535

D. WITH NO QUALIFIED CHILD
This credit is unique in that it is for taxpayers with no qualifying child.
Those filers should not be named as dependents in somebody else's return.
There are age restrictions too for such filers: 25 years or older but below 65 years at the end of the tax year.
The income limits are set far below the limits for the three categories who have qualified children:

Married filing jointly: below $18,470
Head of household: below $13,460
Single filer: below $13,460

Earned Income Credit too is calculated using a worksheet that appears in instructions section of the tax return.

The amount of credit is calculated based on tables provided in the instructions subject to the following Maximum Credit Limits:

No qualified child: $457
One qualified child: $3,050
Two qualified children: $5036
Three or more qualifying children: $5,666

PLEASE NOTE: This article is introductory in nature and deals only with just the essentials of these parental tax benefits. It is not possible to discuss all individual taxpayer situations in an article of this nature. Each of these credits is more comprehensive, applying differently to varying individual taxpayer situations. Please refer to the resources provided by the Internal Revenue (IRS) for more definitive information.