Child Care Tax Deduction

Child care tax deduction can prove to be a bundle of joy

Child care tax deduction is a policy that gives you yet another reason to keep your family tree growing. There are many tax savings that you may be entitled to because of your new bundle of joy. Some of the benefits are:

(a) Supplementary exemption called Dependency Exemption
(b) Child Tax Credit
(c) Child and Dependent Care Credit
(d) Tax deduction, by transferring revenue to the child.

(a) Dependency Exemption: This is a form of personal exemption and it reduces your tax bill by subtracting the necessary amount from your gross income directly proportional to the annual inflation. This exemption should meet the following criteria:
The child (dependent) must be living at your residence throughout the year or he/she must be a relative.
The dependents gross income must not exceed the annual exemption amount. This clause, however, does not apply to children who are less than 19 years of age or are full-time students whose age is less than 24 years.
The taxpayer must support at least half the dependents total cost of living.
The dependent must be a resident of the US, Mexico or Canada.

If the dependent meets all these rules, then all you need to do is furnish the dependents social security number, and you are qualified for another exemption.

(b) Tax Credits: In addition to the personal dependency exemption, there are certain tax credits that may apply to you after your children are born. For instance, you are entitled to Child Tax Credit and Child and Dependent Care Credit. Tax credits are a real advantage because they literally cut the amount of tax you pay on a dollar-for-dollar basis. In cases where the child is adopted, it is even possible for the foster parents to assert tax credits on their income tax for legal adoption expenditure.

(c) Income shifting: Since children fall in a lower tax bracket, it is also possible to save on tax money by transferring funds from the parents to the children. However, care should be taken while doing this. For instance, putting a grown-ups investment in a childs name is not permissible.

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