Taxing Times Call for Tax Savvy Parents - (Tax Year 2002)
by Shannon Nash, Esq., C.P.A.

It’s that time again. Load that copy of Turbotax, get out the box of receipts, and find that W-2 because April 15th will be here before you know it. And thanks to some new tax laws aimed towards parents, a refund may be in your future too.

Child Credits
You can get a tax credit just for having a child. Parents may get up to $600 per child for their 2002 tax return. A child generally includes your son, daughter, grandchildren, stepchildren, and adopted and some foster children. But this child must be under the age of 17 and someone you can claim as your dependent. With extended families, single parents and nontraditional households, many parents are confused about exactly whether or not a child qualifies as a dependent.

“A child is a dependent if the parent provides more than half of that person’s support and support is based on how much it costs financially to care for that child,” said O’sumby Kuti, a CPA, from Upper Marlboro, Maryland. She adds that parents should make sure to include the name and social security number for each child that they are claiming a credit for. Otherwise the IRS will disallow this credit.

Taxpayers with adjusted gross incomes (income after deductions for contributions to 401(k) plans, IRAs, flexible spending accounts, and similar programs) of $122,000 for those married filing joint and $87,000 for single taxpayers are not eligible for the child credit.


Child Daycare Credits
Parents can take a credit for expenses for certain daycare expenses that they pay while they are at work. This credit can be a high as $2,400 for one child and $4,800 for two or more children. But this credit may only be used for children under 13 (see Tax Tips for Families with Special Needs Children for exceptions for disabled children).

Daycare expenses include obvious costs paid to both at home babysitters as well as daycare facilities. It also includes: private schools, after school programs, camps, and even the cost of a housekeeper who cooks and cleans for you as long as the primary purpose is the care of your child.

But Kuti cautions, “Keep in mind, you can’t take this credit if you or your spouse also contribute to a flexible dependent spending account at work.”

Higher Education Expenses
For parents with college age children there are two credits and a deduction that might apply. With the Hope Scholarship Credit, a parent can take up to a $1,500 credit for a child’s tuition and related educational expenses. This credit can only be taken for the first two years of college – the freshman and sophomore year. Also, a $1,500 credit can be taken for each child that qualifies.

The Lifetime Learning Credit may be used for any college student – regardless of his or her year in college. This credit is equal to 20% of the student’s tuition and educational expenses, and capped at $1,000 for 2002 tax returns. However, unlike the Hope Scholarship Credit, the Lifetime Learning Credit is cumulative – it is calculated using the expenses of all children who qualify.

Tuition and educational expenses used in calculating either of these credits include amounts paid to most post-secondary institutions – a college, university and even a vocational school. But they generally do not include expenses paid for books, supplies, expenses, transportation, and room and board. Both credits are completely phased out for taxpayers with adjusted gross income of $102,000 for married filing joint taxpayers and $51,000 for single taxpayers.

As a special added bonus to parents in 2002, Uncle Sam also offers a deduction for qualified higher education expenses. This is an above the line the deduction, meaning that it is as valuable as a dollar for dollar credit – like the Hope Scholarship and Lifetime Learning Credit. The maximum deduction is $3,000 for a student’s tuition and educational expenses and may only be taken by taxpayers with adjusted gross income of $130,000 or less for married filing jointly taxpayers and $65,000 or less or single taxpayers.

“Congress has given parents three wonderful options either as credits or deductions to help with the costs of higher education. But parent’s can only use one of them, so make sure to run the numbers under each option to see which one nets the higher benefit.” Kuti said

Adoption expenses
Families adopting a child may qualify for an adoption tax credit. Parents may take up to $10,000 for expenses incurred in adopting a child. This credit phases out completely for families with income above $190,000.

Resources
• IRS’s website – http://www.irs.treas.gov
• Child Tax Credit – IRS Publication 972, Child Tax Credit
• Child Daycare Credits – Form 2441,Child and Dependent Care Expenses and IRS Publication 503, Child and Dependent Care Expenses.
• Higher Education Credits – Form 8863, Education Credit and IRS Publication 970, Tax Benefits for Education
• Adoption Credit – Form 8839, Qualified Adoption Expenses and IRS Publication 968, Tax Benefits for Adoption


Shannon Nash is a tax attorney and C.P.A. She received her Bachelor’s degree in accounting from the University of Virginia, McIntire School of Commerce and her law degree from the University of Virginia School of Law. She is a member of the Virginia and Washington D.C. bar and holds a C.P.A. license from the State of Virginia. She is an officer of the American Bar Association and Chair of the National Bar Association Tax Section. Shannon lives in Westlake Village, California (outside of Los Angeles) with her husband, an ex-submarine officer, and her son. She also writes the "Special Needs Journey" column.


March 15, 2002