Your Children Are Worth More Under New Tax Laws

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.