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Understanding the Dependency Exemption and Child Tax Credit

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The Gainesville Family Law Attorneys of Alba & Yochim P.A. know that tax season can be a stressful period for anyone. However, for those with children, preparing your tax return can seem all the more challenging. Limiting the amount of your ultimate tax liability is a goal shared by most, and rightfully so. If you are a parent, and plan to file a return this year, it is important to understand what child-related exemptions and credits may be available. While children can impact taxes in many ways, here we limit our discussion to the ‘dependency exemption’ and the ‘child tax credit.’

What is the difference between and exemption and credit?

An exemption, also referred to as a deduction, reduces the amount of taxable income—in other words, these are subtracted from your Adjusted Gross Income. A Credit, on the other hand, is an offset to your tax liability—in other words, it is subtracted from the amount owed, as opposed to the amount taxed. In short, exemptions reduce income taxed, while credits reduce liability owed. Credits are always more valuable for reducing your ultimate tax liability than exemptions if they are of an equal amount.

What is the Dependency Exemption?

In contrast to personal exemptions, which allows individuals to reduce taxable income for their basic living expenses, a dependency exemption allows for an additional deduction for each qualifying child. Only one parent can claim the dependency exemption for a child, and it cannot be split between parents. Further, if the child is claiming his or her own personal exemption, the parent cannot claim the dependency exemption (i.e. where the child is working, provides more than half of their own support, or when a parent that would otherwise be eligible for the exemption, allows the child to take the deduction).

Entitlement to the dependency exemption depends on several factors. First, the child must be under the age of 19; or under 24 and attending school full-time; or permanently and totally disabled regardless of age. Second, the child must have resided with you for more than half of the year (unless the custodial parent allows the noncustodial parent to take the exemption). Third, the child did not provide more than half of their own support. Fourth, and most importantly, no one else is entitled to claim the dependency exemption.

The dependency exemption for 2014 is $3950, however, entitlement to this amount will depend on the income and filing status of the person seeking the exemption. For planning purposes, this amount will increase to $4000 for the 2015 tax year.

What is the Child Tax Credit?

If you are entitled to claim a child as a dependent, then you may also be eligible for a tax credit of up to $1000 for each child that was a U.S. citizen and under the age of 17 at the end of tax year whom lived with you more than half the year and did not provide more than half of their own support. If one parent takes the dependency exemption, the other parent cannot take the child tax credit. In addition, the child tax credit may not exceed the amount of taxes owed. However, taxpayers that are eligible for the dependency exemption, but are ineligible for the regular child tax credit, may qualify for the ‘Additional Child Tax Credit.’

Similar to the dependency exemption, the child tax credit can also be limited depending on your filing status and income. However, the income limitations with the child tax credit are significantly less than the income limitations for the dependency exemption.

Where can I find more information on child-related exemptions and credits?

The Internal Revenue Service’s official website (IRS.gov), offers several publications on this topic. A tax professional can also assist you in determining what credits and exemptions you may be entitled to. In addition, for parents that already have a valid divorce decree or settlement agreement in place, are in the process of a divorce, or were never married, an experienced Family Law Attorney may be able to advise you as to how to go about determining entitlement to, as well as resolve disputes regarding, the child tax credit, dependency exemption, and other family related tax matters.

To view a related topic, see also ‘Which Parent can Claim the Dependency Exemption?

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