Although tax day thankfully occurs only once a year, tax-changing events, such as marriage, divorce and the birth of a child, happen year-round. Any of these events could call for a midyear adjustment in the number of allowances you claim on your Form W-4. You should also start keeping track of expenses that will help you qualify for family-friendly credits, including:
Adoption tax credit. For 2013, this credit is worth up to $12,970 in adoption-related expenses per eligible child. A credit is more valuable than a deduction because it delivers a dollar-for-dollar reduction in your tax bill. The credit is no longer refundable, so if it exceeds the amount of your tax liability, you won’t get a check for the extra amount. You can, however, carry over unused credits for up to five years.
If you’re in the process of adopting, keep a scrupulous record. Not only will it ensure you can claim the maximum credit you’re due, it will also help you answer questions from the IRS. Because this credit is so large, it tends to attract extra scrutiny, so be prepared to substantiate all of your expenses.
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Child- and dependent-care credit. You may qualify for this credit to help defray the cost of paying someone to care for children under age 13 while you work or look for a job. The credit is worth up to $3,000 for the care of one child or $6,000 for two or more children. The credit is a percentage of the amount spent on child care and gradually decreases as income increases. Families that earn more than $43,000 can claim only 20% of deductible costs.
American Opportunity credit. Will your child be attending college this fall? This credit is worth up to $2,500 per student for each of the first four years of college. The credit was scheduled to expire at the end of 2012, but the new tax law extended it through 2017.
To qualify, your AGI must be less than $90,000 if you’re single or $180,000 if you’re married. The credit phases out between $80,000 and $90,000 for single taxpayers and $160,000 and $180,000 for couples. This welcome tax break for parents struggling to pay for college is rarely discussed in financial aid packages, says John Sheeley, an enrolled agent in Goshen, N.Y. If you’re eligible, you can look forward to a big refund next spring. Better yet, adjust your withholding now and give yourself a much-needed raise.
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