Understanding Tax Credits When You Have Children

One of the thorniest issues in a divorce or custody and parenting time matter is who gets to claim the kids on their income tax returns.  It should not be done by going eeny, meeny, miny, moe.  Understanding the ins and outs of the federal and state tax laws can be a difficult undertaking to say the least.  The challenge can be even greater when taking into consideration tax credits available for parents with children or other dependents. 

Many Americans end up paying more than their fair share of taxes because of a failure to take advantage of the numerous tax refund credits available for parents.  The following is meant to serve as a brief overview of several of the federal and state tax credits for which you, as a parent, may be eligible.  A qualified and experienced tax professional would be in the best position to counsel you on these and other credits that you might be entitled to receive.

Earned Income Tax Credit (EITC)

The federal earned income tax credit is designed to help individuals with low to moderate levels of income, particularly those who are raising children.  Eligibility to receive the earned income tax credit is based on income and the number of qualifying children. It is also based on whether the person is able to file as Head of Household.  In 2012, for example, a single person with two qualifying children and earned income of less than $30,000 would be eligible for the tax credit.  The parent in this case would be entitled to a tax credit of $2,512.  There are certain other requirements that parents must meet in order to qualify for the tax credit.  A tax professional can provide further information and advise you on your eligibility to receive the earned income tax credit.

In Minnesota, there is a similar state tax credit available, known as the Minnesota Working Family Credit.  Like the EITC, it is a refundable tax credit based on earned income and the number of qualifying children.  Those who qualify for the federal earned income tax credit, may be eligible for the Minnesota Working Family Credit. 

Child Tax Credit

In addition to the earned income tax credit, parents may also be entitled to a reduction in the amount of federal taxes owed based on the Child Tax Credit.  With this credit, a parent can receive up to $1,000 in tax credit for each dependent child under the age of 17.  In order for a parent to be eligible to receive this tax credit, the child must be a son, daughter, stepchild, foster child, or adopted child.  The tax credit is also available to individuals who claim any of the following as dependents: a brother, sister, stepbrother, stepsister, or a descendant of any of these individuals, such as a grandchild, niece, or nephew.  

Tax payers in higher income brackets, however, may not be eligible or may only be eligible for a percentage of the tax credit.  There are additional restrictions, and a qualified Minnesota tax professional would be in the best position to advise you on whether you qualify for the Child Tax Credit and the amount you are entitled to receive as a credit or refund.  

Child and Dependent Care Credit

The Child and Dependent Care Credit makes it possible for an individual to recover a portion of the amount that was paid for the care of a child, spouse, or other dependent during the tax year.  The credit is only available in situations in which a taxpayer incurs child care expenses in order to enable him or her to work, attend school, or seek employment. This credit is also only available to the taxpayer able to claim head of household.  A taxpayer may be eligible to recover between 20-35% of costs paid for child or dependent care during the year, depending on the individual’s or couple’s adjusted gross income. 

The less income an individual earns, the larger the percentage of care expenses they are able to claim as a tax credit.  An important point to note is that when calculating the credit, the amount of care expenses is limited to $3,000 for one child or $6,000 for two or more children, which may be less than the actual amount paid in child or dependent care expenses during the year.  

In Minnesota, there is also a comparable state version of the federal child and dependent care credit, which entitles a taxpayer to a similar credit or refund on state taxes.

Minnesota Education Credit and Subtraction

In Minnesota, there are two additional tax relief programs for families with children in kindergarten through 12th grade: the K-12 Education Subtraction and the K-12 Education Credit.  The education credit entitles parents to a tax credit or refund based on the amount paid in expenses related to education, including costs for tutors, school books and materials, transportation paid to others, certain extracurricular activities, and, in some cases, computer hardware or software.  The amount of the tax credit is 75% of qualifying expenses and is limited to $1,000 per child. 

The education subtraction works like a deduction, enabling a taxpayer to deduct certain expenditures from their taxable income.  Unlike the credit, 100% of qualifying educational expenses can be deducted.  There is, however, a maximum subtraction: $1,625 for students in grades K-6 and $2,500 for students in grades 7-12.

Seeking the advice of a qualified Minnesota tax professional can save you time and money.  If you are contemplating a divorce or custody/parenting time action, you need this information.  Schedule an appointment with one of the experienced attorneys of Mundahl Law for more information on tax credits and other programs available to ease the tax burden on divorcing or separating parents and families in Minnesota. 

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