Taxes can be a family matter
Deductions, exemptions, credits: You may not have to look any further than your family to cut taxes
When you think of family, you may reflect on birthday parties, weddings, graduations, and taxes. Taxes? While it might not cause you to wax sentimental, your family is an important source of tax planning opportunities.
Credits
and exemptions. The two most common family-related tax breaks are
the child tax credit and the dependency exemption. The $1,000 child tax credit
is a dollar-for-dollar federal tax reduction for each child under 17. The
dependency exemption, which lowers taxes by reducing taxable income, is $3,400
per dependent.
In addition to children, you might qualify to take an exemption for other
relatives, such as elderly parents, if you provide more than 50% of their support.
Taxpayers that provide less than 50% of a dependent's support, but combine
those efforts with other relatives, can file a Multiple Support Declaration
to ensure that someone receives the deduction each year. The dependent must
earn less than the exemption amount ($3,400) to qualify. However, you might
still be able to deduct health care costs that you pay on their behalf – even
if you fail the support test.
Adoptions. Taxpayers
who adopt a child this year could receive even more tax benefits. Qualified
adoption costs can provide a credit of up to $11,390 in 2007. In addition,
adopting a "special needs" child (as defined by your state) will
qualify you for the maximum credit, even if you spend less.
College
planning. College-bound children provide a host of tax planning
challenges. The once popular method of shifting funds or assets to a child
to be used later to pay for college has taken a back seat due to changes
in the "kiddie tax" rules. Now, a child's unearned income
over $1,700 is taxed at the parents' tax rate until age 18 instead
of 14. Next year, the age threshold at which the kiddie tax applies increases
to 19, and to 24 for full-time students. An alternative approach to college
planning might be a Section 529 plan, where funds grow tax-free and subsequent
distributions for qualified post-secondary education are tax-free as well.
Business owners have yet another tool available for college saving — they can shift income to their children by putting them on the payroll. Of course, the pay must be reasonable for the actual services rendered.
Income
limits. Be aware that many of these family tax benefits are subject
to income threshold limits. For example, dependency exemptions begin to phase
out in 2007 when adjusted gross income reaches $234,600 on a joint return.
The child tax credit phase-out is much lower — $110,000. Before making
a move that will increase your 2007 earnings, give our office a call. We
can review the tax implications with you and offer suggestions to help you
make the most of your family tax breaks.