If you are a parent, having a little one (or not so little one), can give you some big tax benefits. You may already know that for 2011 you can deduct $3,700 for each dependent as an exemption on your tax return.

However there are a couple more tax credits that all parents should review to save more on your taxes.

Dependents

Child Tax Credit – $1,000

The Child Tax Credit can be a significant help with reducing your federal taxes. Depending on your income you can claim up to $1,000 per qualifying child.

What defines a qualifying child? There are a few criteria that have to be met:

• Relationship: To claim this credit, biological children, adopted children, step-children, and foster children qualify. Other family members may also qualify.
• Age: Your child(ren) has to be age 16 or younger at the end of 2011.
• Support: Your child must not have provided over half of their own support.
• Residence:  Your child must have lived with you over half of the year.
• Dependent: You have to claim your child as a dependent on your federal taxes.
• Citizenship: Qualifying children include U.S. citizen, U.S. national, and U.S. resident alien.

If you’re using tax software like TurboTax then these factors will be checked as you file your taxes to make sure you get the credit if you qualify.

But the Child Tax Credit isn’t the only tax break you should look at. The Child and Dependent Care Tax Credit can also be a big win for you.

The Child and Dependent Care Tax Credit

If you paid for child care last year, then you may qualify for a tax credit based on your dependent care expenses up to $3,000 for one dependent and up to $6,000 if you are claiming two or more.

To qualify you must also identify the person who provided the care for your child. You and your spouse if filing jointly must have earned income. The child care expenses paid should not be given to your spouse or someone claimed as a dependent on your taxes.

Thoughts on Children and Tax Credits and Breaks

For parents looking at getting their taxes filed, have you looked at the Child Tax Credit and Dependent Care Credit? How much do you qualify for? What credits are you claiming this year?

Interactive by Column Five

Sorry, the money you paid to send your child off to the amusement park this summer isn’t tax deductible, but costs for day camp may be.

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Indeed, summer vacation is greeted eagerly by children around the country (but not in my household, where my oldest is routinely distraught in late June by the reality of no school for an extended period). As for parents, they must prepare for challenge number one: keeping their children busy and out of trouble without breaking the bank.

Enter summer camp

Indeed, summer camp remains a ritual of growing up for some families.  Depending on the camp, the expense varies widely.  Fortunately, there is tax help – maybe.

The Child and Dependent Care Tax Credit  – Qualifications and Expense Limits

The Child and Dependent Care Tax Credit can be applied to summer camp expenses, subject to certain restrictions.  Your first consideration is the type of summer camp.  If your child sleeps over at the camp, that camp does not qualify.  In addition, if your child is 13 or older, he or she’s out – only expenses for kids 12 and under qualify for this credit.

Of course, it’s not as though you’ll instantly get tax help even if you decide to send your nine-year-old to day camp. That’s because there is another limit to the credit.  Once the total dollar amount spent on child care exceeds $3,000 per year for one qualifying child (or $6,000 for two or more qualifying children), you reach the maximum expense for which you can apply the credit towards.  This maximum amount includes not only day camp but also any child care expenses (including a nanny) you incur throughout the year.

Calculating the Child and Dependent Care Tax Credit

The calculation of the credit is based on the number of children under 13, your total child care expenses, and your adjusted gross income (AGI).  If you have one child and spend the maximum or more, you can multiply the top dollar amount ($3,000) by a rate based on your AGI which ranges from 20% to 35%.  The 20% rate applies to households whose AGI exceeds $43,000. Your income must be less than $15,000 to benefit from the maximum 35% rate.

If you have one qualifying child and earn $43,000 or more, your maximum credit may be $600 ($3,000 multiplied by 20%). If you have two or more qualifying children and $6,000 or more in expenses, you may receive a credit of $1,200 ($6,000 multiplied by 20%).  Keep in mind a credit reduces your taxes dollar-for-dollar and therefore may be more valuable than a tax deduction.

The Child and Dependent Care Tax Credit won’t make summer camp free, but it just might make it more affordable.  Just remember to use part of the savings for bug spray.

Tax Credits

A deduction is something that reduces your overall taxable income, therefore lowering your tax bill. A credit is different because it reduces your tax liability, dollar for dollar.

To get a better idea of how significant this is, let’s look at an example. If you were able to take a $1,000 deduction that would mean you would reduce your taxable income by $1,000. So if your taxable income was $40,000, after the deduction it would mean your taxable income would become $39,000. At the 25 percent tax rate, that would effectively lower your tax bill by $250.

Now, let’s say you are entitled to a $1,000 tax credit. In this case, you would simply reduce your tax bill by the full $1,000! As you can see, this is why tax credits are the most sought after.

So, what kind of tax credits are available to you come tax time? Well, here are a few common ones that are worth double checking each year to see if you qualify.

Child and Dependent Care Credits

The most common tax credits have to do with children and there are two main credits. First is the child tax credit, which gives you a credit for qualifying children you take care of. The credit is $1,000 per qualifying child, and you must meet income requirements.

In addition to the child tax credit there is also a credit for child care expenses. Depending on your situation there are many qualifiers and limits to what can be claimed, but any time you have children these are credits worth looking into.

Finally, there is an adoption tax credit as well. This credit is meant to help ease the financial burden of going through the adoption process. This credit can be as high as $13,360 per child.

Elderly and Disabled Credit

Once you reach age 65, or if you are on permanent disability, there are a few tax credits available. Unfortunately, these credits have very low income limits, so they aren’t available to many.

Energy Credits

Going green has its benefits beyond just helping the environment. There are tax credits available on anything from buying Energy Star appliances to a hybrid vehicle. These credits vary greatly depending on what you buy, but you can typically get up to a 10 percent credit of the purchase price on qualifying energy efficient appliances and home improvements, up to a maximum of $500. That’s not too bad if you need to replace an old appliance anyway.

Earned Income Tax Credit

Another popular tax credit for lower income filers is the earned income tax credit, or EITC. If you have earned income that falls below certain limits (based on how you file and family size) you may be entitled to this credit. Families with children really benefit from this credit and may receive a credit anywhere from a few thousand to over five thousand dollars.

Saver’s Credit

Here is a tax credit that often gets overlooked. The saver’s credit helps low to moderate-income filers to save for retirement. This credit is worth up to $1,000 ($2,000 for married filing jointly) for those contributing to a qualifying retirement plan such as a 401k or IRA. As if the credit isn’t enough, keep in mind that contributions made to some retirement plans also count as tax deductions, so you’re basically double-dipping in the tax savings. It makes saving for retirement a no-brainer.

Make Sure You Get Your Credits

As you can see, there are a number of tax credits available, and these are just the most common ones. Some of these can be easy to overlook, and if you aren’t careful you could be leaving money on the table. Using your trusted TurboTax software, you can be sure you’re getting every tax deduction or credit you deserve.

Flexible Spending Accounts

That pre-tax contribution is a big benefit, since your contributions are not subject to income taxes or payroll taxes. So if you contribute $5,000, that may translate to savings of $1,500 or more in taxes each year.

The major drawback? Here’s a hint: The plan’s motto should be “Use it or lose it.” Any portion that you don’t spend by year end on specified expenses is forfeited. And if you are laid off, you not only lose your job, you can lose your unspent contributions as well.

To counter part of that drawback, since 2005 employers have been authorized to add a grace period to their plans, giving employees until March 15 of the following year to spend their flex-spend contributions. And once over-the-counter medications were added to the list of eligible expenditures in 2003, employees who still had a balance in their account could stock up before the grace period expired.

Kiss that benefit bye-bye. Beginning in 2011, over-the-counter medications can’t be reimbursed from a flex-spend account. So don’t count on cleaning out your account at the end of this year by stocking up on cold and allergy medications, vitamins, sunscreen and aspirin. But pssst, here’s a little secret. There are several exceptions to this rule:

• If you have a doctor’s prescription, the medication is eligible for reimbursement even if it is over-the-counter. So ask your doctor for formal documentation for any over-the-counter medicine he or she recommends. Your doctor may object because it’s more paperwork, but it will save you money, so push for the prescription anyway.
• Insulin is covered, even if it is purchased without a prescription.
• Also covered are other expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles.

Okay, you say, I can live with those changes, as long as I get to enjoy that big fat $5,000 a year pre-tax benefit. Oh, sorry, here’s some more bad news: beginning in 2013 your annual contribution limit will be $2,500, only half of the amount allowed by most employer plans currently. To ease your pain a bit, this cap will be adjusted annually for inflation.

Why are they doing this to us? These changes are part of the new health law legislation that is phasing in over the next few years. Congress felt that employees wouldn’t need flex-spending accounts once health care coverage was more affordable and comprehensive. And besides, limiting the tax break helps the government muster the revenue it needs to finance the health care overhaul.

Most employees don’t take full advantage of flex-spend accounts, and the average contribution is only $1,400 or so. But if you contribute more heavily, you will definitely be affected by the upcoming change in contribution limits. With the new $2,500 maximum contribution limit coming up, consider scheduling any big medical procedures for the upcoming year, such as Lasik eye surgery, elective dental work or braces. That way, a big chunk of those expenses can be paid with pre-tax money.

Here are 5 important facts about this tax credit for child care expenses:

The Child & Dependent Care Credit

First, some basic information about the credit itself. It’s called the Child & Dependent Care Credit. The IRS covers the ins and outs extensively in an article on the credit, but we’ll summarize the key points here:

• The care must be provided for a qualifying person who is your dependent under the age of 13  when care was provided.  Note: Care may also be provided for your spouse or certain other dependents who are physically and mentally incapable of self-care.
• Your child or qualifying person must be in summer camp or daycare so that you can work or look for work (not just because you don’t feel like watching them).
• Your tax filing status must be single, married filing jointly, head of household, or qualifying widow(er) WITH a dependent listed on your return.
• The child must have lived with you for more than half of the tax year in question (2011, in this case).
• The care provider must be identified in your tax return and CANNOT be your spouse, the parent of your qualifying person, or your dependent child under the age of 19 by the end of the tax year.

Overnight Camps Don’t Qualify

source

Many parents will be relieved to hear that summer camp expenses can be deducted from their taxable income on 2011′s return. Unfortunately, there is a small caveat. While day camps (and daycare facilities) are eligible for deduction, overnight “stay-away” camps are not.  Attempting to deduct overnight camp expenses via the Child & Dependent Care Credit could land you in serious trouble in the event of an audit later on.

Home Babysitter or Daycare Facility?

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Other parents will ask whether the credit applies only to established day care centers and summer camps, or whether it also applies to at-home babysitters. Luckily, it applies to both. So long as you meet the requirements for the Child & Dependent Care Credit, it does not matter whether the care is provided by a facility or a personally chosen babysitter. You simply need to provide your babysitter’s Social Security number on Form 2441.

What if your babysitter doesn’t provide their Social Security number, or you can’t track them down in time to file your return? The IRS says:

Answer: If you meet the other requirements to claim the child and dependent care credit, but are missing the social security number or taxpayer identification number of a provider, you may still try and claim the credit by demonstrating “due diligence” in attempting to secure this information. To prove you used “due diligence”, request that your day care provider fill out Form W-10, Dependent Care Provider’s ID and Certification to request the necessary information.  If this form is not used, you can use the following sources:

• Copy of the provider’s social security card.

• Copy of the provider’s completed Form W-4, Employee’s Withholding Allowance Certificate.

• Copy of a statement furnished by your employer if the provider is on your employer’s dependent care plan.

• Letter or invoice from provider.

The taxpayer must provide whatever information is available about the provider (such as name and address) on Form 2441 (PDF),Child and Dependent Care Expenses.  Write “see page 2″ in the columns requesting the missing information. Write at the bottom of page 2 that the provider refused to give the requested information.  Daycare providers who refuse to give the necessary information will face penalties.

Please note, if the daycare provider is a tax-exempt organization, such as a school or church, then you do not have to show the taxpayer ID number.  You can write “tax-exempt” in the space where the number is required.

35% of Qualifying Expenses

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A common misconception about the Child & Dependent Care Credit is that you can deduct ALL of your qualifying expenses. This is actually untrue. You are only eligible to deduct 20%-35% of qualifying expenses, depending on your adjusted gross income. The higher your adjusted gross income, the lower the percentage of the deduction.

The rules have not yet been changed for 2011, but last year, the requirements were:

Other Creditable Expenses

(source)

Daycare or babysitting fees are the main deductible expenses, but they are not the only ones. You are also eligible to write-off the costs of ancillary services related to care, such as meal preparation or even housecleaning (if you hire a qualifying at-home babysitter.) The key to doing this successfully, as with other credits and deductions, is keeping extremely solid records.

The IRS knows how easy it is for unscrupulous taxpayers to invent “costs” out of thin air. Being targeted with an audit could mean the IRS is suspicious of that. The only way to protect yourself is with hard documentation proving your write-offs were valid. Our blog post Would Your Tax Records Survive a Natural Disaster was written precisely because records are so important – don’t neglect them when deducting summer care costs!

For more information related to this topic also check out our blog,  Writing Off Your Summer:  Preparing for Next Tax Season and Who Can I Claim as a Dependent for This Tax Year.

1. Consider Life and Disability Insurance

From diapers to diplomas, the cost of raising a child can really add up. If something awful were to happen to you or your spouse, life and disability insurance offer a safety net to keep your loved ones’ financial lives on track. You can get an estimate of your insurance needs by using the online calculators at the non-profit Life and Health Insurance Foundation for Education (LIFE).

2. Build an Emergency Savings Fund

You never know when your roof will spring a leak or when the job market will turn sour. Keeping six months of income in a savings account or money market fund can help weather life’s inevitable pitfalls. Try setting aside money at the beginning of the month, not the “extra” at the end – there’s rarely any extra!

3. Start Saving for College

Your baby may not even be crawling yet, but with college costs rising 40% in the last decade, it’s a good idea to start saving early. Consider opening a Section 529 college savings account. As long as you use the account for qualified higher education expenses, all distributions will be tax-free.

4. Let your employer help

Many employers offer flexible spending accounts which allow you to set aside thousands of dollars in pre-tax income to pay for qualified childcare and healthcare expenses. Depending on which tax bracket you are in, using these accounts can save you thousands of dollars a year.

5 . Claim the child care credit

Your baby brings a new dependent deduction for your tax return, but other benefits are available as well. Though child care is expensive, Uncle Sam can help take the sting away with a tax credit. If you work and pay for child care, until your child turns 13, you can claim up to 35% of the first $3,000 of expenses ($6,000 for two or more children). Nursery school, private kindergarten, after school programs and day care are all qualifying expenses.

The financial stakes rise considerably when you bring a new child into the world. As you travel the road to financial security, be sure to take time to enjoy your new baby!

Click here for more tax tips for new parents.

To all new parents who entered the contest – congratulations on your beautiful new bundles of joy and 17 more years of tax credits of course!

For more tips on being a tax-savvy parent, check out this post.

Just who qualifies as a middle class these days? The Middle Class Task Force says that the majority of Americans describe themselves as middle class or working class. “Middle class families are defined by their aspirations more than their income,” its report says. Those aspirations include home and auto ownership, retirement security and college education for children.

To help American’s achieve those goals, the Obama administration has come up with several tax proposals. The president addressed these initiatives in his State of the Union address:

Automatic Retirement Savings for Workers

Roughly half of the American workforce—some 78 million workers—does not have a retirement plan at work. The administration would like their employers to automatically enroll employees in a tax-deferred retirement plan, known as a workplace IRA.  (Employees will be able to opt-out of the plans.)

Contributions to these plans will be voluntary for workers. The smallest firms—although the White House didn’t specify how small—would be exempt.

To encourage workers to save in these automatic plans along with other qualified retirement accounts, the Savers Tax Credit will match contributions. The proposal calls for matching 50% of the first $1,000 of retirement contributions by families earning less than $65,000. There’s a partial credit for families earning up to $85,000.

The automatic retirement savings is based on a large body of research in the area of behavioral finance that shows people save more when decisions are made for them. A study from the Employee Benefit Research Institute finds that employers adopting automatic enrollment in their 401(k) retirement plans have also generally increased the “employer match” to participant’s accounts—in some cases, by a significant amount.

Boost Childcare and Dependent Care Tax Credit

There is some additional tax relief for an estimated 38 million Americans who are providing unpaid care to an aging relative. And many of them are part of the sandwich generation—they are also caring for their children while looking after elderly family members. The administration wants to practically double the child and dependent care tax credit for families earning less than $85,000 a year. (Credits will rise from 20% to 35% of qualifying expenses.)

Almost all eligible families making under $115,000 a year could see a larger credit, too. Families could claim up to $3,000 in expenses for one child or $6,000 for two children. The maximum credit for a family with two children making $80,000 a year would increase from $1,200 to $2,100.

Student Loan Relief

Recent college graduates are often saddled with more than $23,000 in debt. In a tough economy with few jobs, they are struggling to pay off their student loans. The administration is calling for a cap of student federal loan payments to 10% of a student’s income (above a basic living allowance).

Here’s how it works: the monthly payment for a single borrower earning $30,000 who owes $20,000 in college loans would be $115 a month – as opposed to $228 a month under the standard 10-year repayment plan, according to the plan. The income cap could cost the government about $1 billion over the next five years, estimates Mark Kantrowitz of Finaid.org.  “This proposal would yield meaningful repayment relief to hundreds of thousands of borrowers whose federal student loan debt exceeds their income,” Kantrowitz says. “It would cut their monthly payments by one-third and forgive the remaining debt sooner.”

You can find more information about the tax proposals from this White House Fact Sheet.

Undeniably, though, children are expensive. Parents and guardians have to provide food, clothing, education, health, shelter, time, love, and care to raise a thriving child, and those things can really eat into your pocketbook.

Thankfully, the tax laws offer quite a bit of help to parents by making the burden of taxation easier on them. Here are five key things to remember if you’re a parent.

1. Standard Deduction Each child in your family is another dependent on your tax form, which means a $3,750 deduction if you’re filing using standard deductions (which many people do, particularly those who do not own homes). If you have two children, like I do, this can easily save you $1,000 on your tax bill, if not more.

2. Child Tax Credit You can earn a tax credit of up to $1,000 per child if your total household income is $110,000 or below. See IRS Publication 972 for full details on this benefit.

3. Child and Dependent Care Credit You can earn a tax credit of up to 35% of your child care expenses. If you have child care for your children, this is a must. See IRS Publication 503 and Form 2441 for the full scoop.

4. Education Credit If you have a student enrolled in an eligible educational institution (most colleges qualify), you can get the Hope Education Credit, which is worth up to $1,800. Check out IRS Form 8863 for more information.

5. Earned Income Tax Credit If you have children, it’s much easier to qualify for the Earned Income Tax Credit, which is a powerful benefit for people with a low income. You can use the IRS EITC Wizard to find out if you qualify for this credit.

Having a child may be expensive, but that child can do wonders when it comes to tax time.

TurboTax Blog Team Note: Check out the TurboTax Cutest Last-Minute Tax Deduction Contest for a chance to win $5,000.