Your Children Are Worth More Under New Tax Laws

Your children are, without a doubt, your most valuable possession, and according to 1997 tax laws, you can claim a certain amount of tax credit for each of your dependents.

By Ginita Wall, CPA, CFP, CDS
Updated: September 02, 2014
Tax and Divorce

Your precious darlings are now worth a bit more to you. Since 1998 you can claim a child tax credit of $400 for each child under 17, increasing to $500 in 1999. The credit applies to your children, grandchildren, step children and foster children.

The credit begins to disappear once you income exceeds $75,000 ($110,000 on a joint return), and it is eliminated when your income exceeds $84,000 ($119,000 on a joint return).

Divorce Planning Tips for the child tax credit:

  • The child tax credit is available only if you claim the exemption for the child. Thus, the exemption is worth $500 a year more as a bargaining chip in divorce negotiations.

  • Divorcing parents should pay special attention to the phase-out rules. If one parent's income is over $75,000, he won't enjoy the full child tax credit. Thus, it may save income taxes to award the exemption to the lower-earning spouse.

Education of Children has gotten easier

There are three new tax-saving schemes for those paying education expenses for themselves or their children.

Educational IRAs. Parents can now contribute up to $500 a year to educational IRAs for children under 18. No deduction allowed for the contribution, but the IRA earnings are tax-free if used for higher education. Contributions for each child are limited to $500 a year, and only parents with income of $95,000 or less ($150,000 on a joint return) may make the full contribution. If both parents qualify, divorced parents will have to agree whether each parent will contribute $250, or one parent will contribute the full $500.

The HOPE credit. The new HOPE credit provides a tax credit of up to $1,500 per year for the first two years of higher education for a child. The full credit can be claimed only by taxpayers with $40,000 of income or less ($80,000 on a joint return.) The credit can be claimed for each child for whom education expenses are paid, and for education expenses for the parent as well. The only restriction is that each student must be enrolled least half time.

The lifetime learning credit. The lifetime learning credit allows a 20 % credit against taxes for up to $5,000 of tuition and fees paid after June 30, 1998. There is no requirement that the student be enrolled at least half time. The credit is figured on a per-family basis, not a per-student basis, and so families with more than one student in school generally will receive a greater tax benefit from claiming the HOPE credit than the lifetime learning credit. As with the HOPE credit, the full credit can be claimed only by taxpayers with $40,000 of income or less ($80,000 on a joint return).

Divorce Planning Tips for your child ’s education:

  • The HOPE credit and the lifetime learning credit are available only to a parent who both pays for education expense and claims the child as a dependent. If the parents are divorced and one pays tuition while the other claims the dependency exemption, the credit will be lost. Divorce agreements should provide that the parent paying the tuition may also claim the dependency exemption.

  • In divorce situations the earning restrictions may mean that the lower-earning parent may be the only one eligible to claim the HOPE or lifetime learning credits, yet only the higher-earning parent can afford to pay the children's tuition. It may save taxes for the higher-earning parent to funnel tuition money to the lower-earning parent, who then pays the tuition. The parents could agree that the money transferred would be deductible spousal support for the paying parent. (Such agreements must be in writing to qualify for the deduction.) Alternatively, the parent claiming the credit could agree to use the tax savings to pay additional education costs for the children.

  • Only one of the three new education provisions can be used each year with respect to each student. Divorced parents may have to agree on which credits or exclusions will be claimed each year for each child. For example, the HOPE credit could be used during the first two years of higher education, the educational IRA exclusion the next year, and the lifetime learning credit the year after that. The goal should be to reap the maximum tax benefit during the college years of the child.


Ginita Wall, CPA, CFP, CDS can be reached at (858) 792-0524 or via the Internet at www.planforwealth.com or at www.wife.org.

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April 28, 2006
Categories:  Financial Issues

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