Kids and taxes: new planning opportunities.

• Author: Schnepper, Jeff A.
• Position: Economic Observer - 2001 Tax Act - Brief Article

THE U.S. TAX CODE has become very kid-friendly since the 2001 Tax Act. You can actually get several tax credits for having a child.

Child tax credit. If you have an offspring under age 17, the 2001 Tax Act grants you a limited per-child tax credit increasing to $1,000, phased in over 10 years. (2001-04, $600; 2005-08, $700; 2009, $800; 2010 and later, $1,000). This credit is phased out for couples earning more than $110,000 and singles earning over $75,000. For every additional $1,000 or part thereof, you lose $50. So, with a joint return with income over $119,000, it is eliminated completely. For years 2001 through 2004, the child credit is actually refundable to the extent of your earned income in excess of $10,000. "Refundable" is fancy tax talk that means that the IRS will send you the money even if you have no tax liability. It's like a negative tax.

Adoption tax credit. Attach Form 8839 to your 1040 to claim this credit. The 2001 Tax Act permanently extended the adoption credit for kids other than special-needs children (which was already permanent), and increased the maximum credit to $10,000 per eligible child, including special-needs youngsters. A $10,000 credit is allowed in the year a special-needs adoption is finalized whether or not you actually have any qualified adoption expenses. Under the new law, the adoption credit is permanently allowed against the alternative minimum tax, and the beginning of the income phase-out range is doubled to $150,000 of modified adjusted gross income.

Child and dependent care credit. Attach form 2441 to your return. This special credit applies your expenses for child care paid so both spouses can work. (There are special provisions as well for a spouse who is a student or disabled.) These expenses include more than direct child care. Almost any expense that relates to child care and allows both spouses to work qualifies. For example, expenses for household help to clean your house clearly count.

As of Jan. 1, 2003, the 2001 Tax Act increases the maximum child and dependent care credit you can get from 30% to 35%, and raises the maximum single child expense basis to $3,000, up from the current $2,400. This credit doubles if you have two or more qualifying children. You get no additional benefit for more than two children--at least no tax benefit.

Education credits. Do you have a kid going to college? Take a gander at Form 8863. The IRS will pay as much as $1,500 of the first $2,000 of qualifying...