Your Tax Question - 064

Dear John, I have friends who adopted a child this year from Russia. Isn’t there a tax deduction for adoption? Thanks, Kelly
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Hi Kelly,

I would advise your friends to consult the agency that helped her arrange her adoption for specifics to their case. But to answer your question: Yes, there is a tax deduction for adopting.

Congress gives you a refundable $12,150 per adopted child tax credit. This means that should your tax liability be $5000 and you spent $12,150 in qualified expenses then the US Government will give you $7,150 back. But this is only the deal for this year and next year. Beginning in 2012, the credit reverts to just $5,000 and it is not refundable.

Thanks,
John

Your Tax Question - 061

Dear John, So is it true that this is the final year for the $1000 per child tax deduction? I was really like this little reduction from the taxes that I pay each year. Please let me know. Sincerely, Angela
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Hi Angela,

The child tax credit was due to expire after 2010 but it has been extended for two years. The child tax credit allows parents to reduce their federal tax bill by up to $1,000 for each qualifying child under age 17.

Also, the expansion of the Earned Income Tax Credit included in the economic stimulus package will continue for two more years as well. But I will leave that for another post.

Thanks,

John

PS. As of now, there are only 76 more days until tax day. If you could use a tax preparer I happen to know this really cool guy that does this sort of thing.

Your Tax Question - 027

Dear John, I have heard that the Child Tax Credit that returns $1000.00 per child per family will be expiring this year - is that true? Thx, Clair
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Hi Clair,

Yeah, it's true. 2010 will be the last year for the $1000.00 credit and in 2011 the CTC will revert to a $500.00 credit. Unless Congress acts to extend it - that is the plan.

I'm not much of an activist but this is one of the issues that I think I will write Congress about. If you also want to write a letter, here is a list of suites that will help you do that.

1. How to write a letter to Congress.
2. How to find you congressional representatives.

And FYI - I've heard that it is good to sign your name in blue so that your reps know that it is not part of a mass mailing campaign.

Good luck,
John

Your Tax Question - 006a

Dear John, Since the downturn in the economy my household has grown and I now have more people living in our home. My wife's 12 year old son moved in with us after his father lost his job and could not afford to keep him, my brother-in-law and his family moved in a few month's ago after he lost his house, and my great-uncle has moved in with us. (It is a zoo around here.) What sorts of things do I need to consider when tax time rolls around? Thank you, Wendel
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Dear Wendel,

I remember seeing the movie "Cheaper By The Dozen" and thinking that it would be great to have a busy house - I cried 'Uncle' after the third child.

Your question has many things that a tax expert would need to discuss with you - I highly advise this. However, I want to take this opportunity to explain 2 issues that you will need to consider for this tax season. With all of the people that you describe as living in you home you may be able to claim all or some of them as your dependent. There are 2 basic types of dependents available to you: Qualifying Child & Qualifying Relative.

First, Qualifying Child: There are 5 test that ned to be met before a child can be considered your dependent.

1. Relationship Test
2. Age Test
3. Principal Place of Abode Test
   
4. Support Test
5. Join Return Test

1. The relationship test is very liberal for who is your dependent as a child.

• Your child, step-child, or decedent of either a
• Your sibling, step-sibling, or decent of either satisfies the relationship test.
  
• This also include foster or adopted children as well.

2. The Age test stipulates that a child:

• Be younger than the taxpayer
• Younger than age 19 (or a full-time student under 24 years of age)
• This test is suspended for anyone who is permanently disabled at at anytime during the year.
  

3. The Principal Place of Abode Test:

• More than one-half of the year.

4. The Support Test:

• Must not have provided for more than 1/2 of there support for the year.

5. The Joint Return Test:

• The dependent must not have filed a Joint Return with their spouse except as a claim for refund.

A big thing to consider is that no child is claimed twice. The IRS frowns on this and will determine who the rightful claimant is dependent on their standard known as the "Tie Breaker Rules".

These are the basics of claiming a person as a Qualifying Child for dependent status. In the next post I will continue answering your question as I will describe who is a Qualifying Relative.

John

PS. I highly suggest talking through the issues with a tax professional - Email me.