Kids and Taxes

Whether you added a new baby to your family last year or sent a child to college, children and taxes go hand-and-hand. Make sure you take advantage of all the child-related tax breaks when you file your 2008 return.

You can claim a personal exemption, worth $3,500 in 2008, for each dependent child younger than 19, or full-time college student younger than 24. Depending on your income, you may also claim a child tax credit of up to $1,000 for each dependent younger than 17. The child credit, which reduces your tax bill dollar-for-dollar, is reduced by $50 for each $1,000 (or fraction thereof) by which your modified adjusted gross income exceeds $75,000 for individuals or $110,000 for married couples filing jointly.

If you pay someone to watch your child while you and your spouse work -- or if you are a working single parent -- you may be able to write off some of your childcare expenses. Depending on your income level, you can take a tax credit for a portion of your childcare expenses or use a flexible spending account plan at work that allows you to pay your childcare costs with pre-tax dollars. The tax breaks apply to expenses for children up to age 13 as well as older children who are physically or mentally disabled.

The child care tax credit runs from 20% to 35% of what you spend, depending on your income. Taxpayers with adjusted gross income of $15,000 or less get the top credit and the rate gradually declines until it hits 20% for taxpayer with AGI of $43,000 or more. The maximum credit is $3,000 for one child and $6,000 for two or more children.

The flex plan is often a better deal for higher earners because money run through a flex plan avoids the federal income tax, state income taxes and the Social Security tax. If you’re in the 25% federal tax bracket, 5% state bracket and also avoid the 7.65% Social Security tax, running $1,000 through the flex plan would save you 37.65% or $3,765.

If the flex plan is better for you, note this twist: No more than $5,000 can be funneled through a flex plan, but up to $6,000 can qualify for the credit if you’re paying for the care of two or more children. So, even if you max out on the flex plan, you may qualify to claim the credit against up to $1,000 of additional expenses.

The days of giving appreciated assets or income-producing property to young children and teens as a way to trim the family's tax bill are over. In 2008, a youngster's investment income of more than $1,800 is taxed at the parents’ higher rate. The first $900 of a child's unearned income is tax-free and the next $900 is taxed at his or her own rate.

The kiddie tax now applies to children under age 19 and full-time students under 24. Previously, it disappeared when a child turned 18. (Children who provide more than half of their own support are not affected by the kiddie tax change.)