Children Can Help You Earn Tax Credits 

For some years now, working parents have been eligible for a tax credit to help defray the cost of caring for dependents. Starting in 1998, regardless of whether or not they are working, all taxpayers with qualifying children under age 17 as of the end of the year may be entitled to a new child tax credit. You do not need to itemize your deductions in order to be eligible for these two tax credits. What's more, unlike deductions and adjustments, which are subtracted from your income, a credit is especially valuable because it is a dollar-for-dollar subtraction from the tax you would otherwise owe.

WORKING PARENTS CAN CLAIM DEPENDENT CARE CREDIT

The dependent care credit is available to working parents who meet certain requirements. The child or dependent expenses you incur must be necessary for you, and your spouse if married, to be employed or to actively seek employment away from home, and you must provide more than half the cost of maintaining a home you live in with the person(s) for whom you are taking the credit. Qualifying dependents include (1) a child under the age of 13 whom you can claim as a dependent, (2) a spouse who is physically or mentally incapable of self care, and (3) other dependents, regardless of age, who are physically or mentally incapable of self care.

The child-care credit is based on your adjusted gross income (AGI), and ranges from a low of 20 percent to a high of 30 percent of expenses paid during the year. If your AGI comes to $10,000 or less, the 30-percent credit applies. If your AGI exceeds $28,000, the 20-percent credit applies. When your AGI falls between $10,000 and $28,000, the 30-percent credit is reduced by 1 percent for each $2,000 of AGI in excess of $10,000. For example, a person with an AGI of $20,000 would qualify for a 25-percent credit. If you're married and living together, you must file a joint return to claim the credit.

The credit applies only to employment-related child care expenses of up to $2,400 for one dependent and $4,800 for two or more dependents. These limits apply even if your actual expenses are much greater. The IRS defines employment-related expenses as the cost of hiring a babysitter, companion, caretaker, or nurse to care for your dependent or to provide household services, such as cleaning and cooking.

You can include the money you pay certain relatives to help you, as long as they can't be claimed as dependents by either you or your spouse. For example, payments you make to your sister to look after your bedridden mother qualify, provided that you don't show your sister as an exemption. However, you may not count payments to a son or daughter who is under the age of 19 and cares for a younger sibling.

To take advantage of the dependent care credit, you must provide your child-care provider's Social Security number (or other taxpayer identification number) along with the person's name and address on Form 2441, Child and Dependent Care Expenses, which you file with your return.

If your employer provides a dependent-care assistance plan, you may not be eligible for the child-care credit. This is because the law says the amount of expenses eligible for the credit must be reduced dollar-for-dollar by the amount of expenses paid for by employer-sponsored dependent care assistance programs. Run the numbers to decide whether the child-care credit or the dependent-care assistance plan provides the greater tax benefit to you.

CHILD CREDIT AVAILABLE TO ALL PARENTS

Beginning in 1998, a new tax credit is available for each qualifying child who is under the age of 17 at the close of the tax year. The amount of the credit will be $400 per child for 1998 and increases to $500 per child for 1999 and thereafter. A qualifying child is a child, grandchild, stepchild, or eligible foster child for whom you can claim a dependency exemption. The child must be a U.S. citizen, resident, or national.

The child tax credit begins to phase out if modified AGI exceeds $110,000 for married couples filing joint returns, $75,000 for single filers, and $55,000 for married persons filing separately. For each $1,000 (or fraction thereof) of AGI in excess of the threshold amount, the credit is reduced by $50.

The child credit and dependent care credit provide valuable tax breaks for those who support others. Don't overlook them on your 1998 return and carefully consider the income thresholds for each of the credits as you plan your 1999 taxes.