How Children Can Help You at Tax Time

There may be many times during the year when you lose patience with your children, but this time of year – tax time – you should stop and appreciate them. They're money in the bank, literally.

For starters, dependents – and what child isn't a dependent – earn you a tax exemption. On Form 1040, you list them by name and Social Security number on line six. Then, on line 42, each dependent earns you an exemption of $3,700 that is subtracted from your adjusted gross income.

While most children are dependents, not all dependents are necessarily children. In some cases, a qualifying relative may be claimed as a dependent.

Generally, the Internal Revenue Service says you may not claim a married person as a dependent if they file a joint return with their spouse. Also, to claim someone as a dependent, that person must be a U.S. citizen, U.S. resident alien, U.S. national or resident of Canada or Mexico for some part of the year. There is an exception to this rule for certain adopted children.

Child and Dependent Care Tax Credit

There's another way you children can help you with your taxes. If you paid someone to care for your child, spouse, or dependent last year, you may be able to claim the Child and Dependent Care Credit on your federal income tax return.

There are a number of criteria for qualifying. For example, thecare must have been provided for one or more qualifying persons. A qualifying person is your dependent child age 12 or younger when the care was provided.

Additionally, your spouse and certain other individuals who are physically or mentally incapable of self-care may also be qualifying persons. You must identify each qualifying person on your tax return.

You – and your spouse if you file jointly – must have earned income from wages, salaries, tips, other taxable employee compensation or net earnings from self-employment. One spouse may be considered as having earned income if they were a full-time student or were physically or mentally unable to care for themselves.

The payments for care cannot be paid to your spouse, to the parent of your qualifying person, to someone you can claim as your dependent on your return, or to your child who will not be age 19 or older by the end of the year even if he or she is not your dependent. You must identify the care provider(s) on your tax return.

The credit can be up to 35 percent of your qualifying expenses, depending upon your adjusted gross income. For more information about the credit, see IRS Publication 503.