Tax Breaks Every Parent Should Know About

You might be surprised to learn that the IRS does not tax every single dollar that you earn. Instead, the IRS gives you a very modest tax exemption ($3,200 per person in 2005) to cover your basic living expenses. Single people can take one exemption for themselves. Married couples can take one for each one of them.

When you add a child to your family, you can add one more exemption (called a "dependent exemption"). This means that you get an additional tax deduction of more than $3,000 every year until your child turns 19 -- a nice baby gift from Uncle Sam!

In terms of actual tax savings, the amount you save with the dependent exemption depends on your tax bracket. The higher your tax bracket, the more savings you get -- unless your income is so high that you cannot claim the exemption at all (see below). For example, if you were in the 10 percent tax bracket, you would save about $320 per child with the dependent exemption in 2005. But if you were in the 25 percent tax bracket, the dependent exemption would save you $800 per child.

Like many of the best tax breaks, the dependent exemption is phased out for higher earning families. For the 2004 tax year, for example, married couples filing jointly could not claim the dependent exemption at all if their adjusted gross income was more than $336,550, and they would have lost a portion of their dependent exemption if their adjusted gross income exceeded $214,050.

If you qualify for the dependent exemption, claiming it on your tax return is easy. Simply complete line 6C of Form 1040 or Form 1040A, making sure to provide a Social Security number or Adoption Taxpayer Identification Number for your child in column 2. Also be certain to complete line 41 of your Form 1040 or line 26 of your Form 1040A.

The child tax credit

The dependent exemption isn't the only tax break that parents can claim. Provided your income is below a certain limit ($130,000 for married couples filing jointly in 2004), you can also claim the child tax credit. The child tax credit trims your tax bill by $1,000 per child. Because it's a credit, and not a deduction, the child tax credit gives you $1,000 back in your pocket for every child that you have.

To determine the amount of the child tax credit you can claim, complete the child tax credit worksheet contained in IRS Publication 972, Child Tax Credit. (You can download this publication for free from the IRS Web site.) Then enter the amount of your child tax credit on line 51 of Form 1040 or line 33 of Form 1040A. Also complete line 6C of Form 1040 or form 1040A and provide a Social Security number or Adoption Taxpayer Identification Number for each child. Finally, check the box in column 4 of line 6c for each child for whom you're claiming the child tax credit.

Where to get more tax-saving tips: You can find plenty of helpful tax advice on the IRS Web site.