Your Child Can Offer You Tax Relief

Owing tax at the end of the year can pose an IRS tax problem that, if not paid, may cause the IRS to initiate collection actions against you such as IRS levy, tax lien and wage garnishment. The options that you have then are to pay the tax immediately, negotiate an installment agreement, or even submit an offer in compromise. Some people may not qualify for an offer in compromise, but will qualify for what is called a currently-not collectible status. 

The best option is to reach a tax resolution before the tax problem arises. This can be accomplished by tax planning. Tax planning can include deferral of income, acceleration of expenses as well as re-characterization techniques. 

Among the tax planning benefits are those afforded by having a child. According to a recent IRS release, there are ten benefits which the IRS is reminding taxpayers to take advantage of. The first benefit is the obvious one which is the personal exemption amount. You multiply the numbers of your dependents by the amount of the personal exemption. The IRS refers taxpayers to publication 501 for details about the exemptions. 

The next benefit results from the amount that you pay to your child daycare. This amount offers you a credit (dollar for dollar). It is applicable for all your children under age 13. Just make sure to have the proper information about the care provider such as name, address and federal identification number, and of course the amount you paid them for the care of your children. 

Child tax credit is offered for each child under 17. You may benefit from another credit called additional tax credit if you do not fully benefit from the child credit. See publication 972 for those credits. 

The next credit is earned income credit which is a credit given to people who work as wage earners or self-employed. Passive income such as rents and interest does not qualify for the earned income credit. Publication 596 speaks in detail about this credit. 

Adoption credit is a credit that will offer you tax help in defraying the adoption expenses. You claim the credit on from 8839. You must file a paper return to claim the adoption expenses. 

You can also get a credit for the tuition and fees that you pay on behalf of your child. The American Opportunity and the Lifetime Learning Credits are credits that enable you to reduce your tax debt dollar for dollar. You can also claim the interest paid on the student loan. For more details see publication 970. 

As always, documentation is important. Your documents will come in handy when you have an IRS audit and will go further if you have to go to audit appeal.