By Steve Julal
Families find themselves overwhelmed by the expenses that come with each additional new member to the family and death of a family member. As a family, you may be able to save more on your taxes than a single person can. Once you discover all the deductions that are available to you, you will be able to save more money this year, and plan better for your family’s future.
Tax exemptions for you and your dependents
You might be surprised to learn that the IRS does not tax every single dollar that you earn. An exemption is an amount you can subtract from your Adjusted Gross Income, just by having dependents. Personal and dependent exemptions for yourself and qualifying family members reduce the amount of income on which you will be taxed.
For 2014, you can claim a $3,950 exemption for each qualifying child, which may include your child or step child, foster child, sibling or step-sibling, or decedents of any of these, such as your grandchild. This means that you get an additional tax deduction every year until your dependent turns 19, or under 24 and a full-time student for the year (defined as attending school for at least part of five calendar months during the year).
There is no gross income test for a qualifying child. That means you can claim an exemption even if the child has a fair amount of income, as long as the child does not provide half of his or her own support.
The Child Tax Credit
The dependent exemption is not the only tax break that families can claim. Provided that your income is below $110,000 for married couples filing jointly, $75,000 for a single head of household, or $55,000 for a married person filing separately, you can also claim the child tax credit. The child tax credit trims your tax bill by $1,000 per child. Because it is a credit, and not a deduction, the child tax credit gives you $1,000 back in your pocket for every child that you have. There are seven qualifying tests to consider: age, relationship, support, dependent status, citizenship, length of residency and family income. You and/or your child must pass all seven to claim this tax credit.
How to determine who qualifies for the credit?
Age: To qualify, a child must have been under age 17 (i.e. 17 years old or younger) at the end of 2014.
Relationship Test: The child must be your own child, stepchild, or a foster child placed with you by a court or authorized agency. An adopted child is always treated as your own child. You can also claim your brother, sister, stepbrother or stepsister. And you can claim descendants of any of these qualifying people, such as your nieces, nephews and grandchildren.
Support Test: To qualify, the child cannot provide more than half of his or her own financial support during tax year.
Dependent Test: You must claim the child as a dependent on your tax return.
Citizenship Test: The child must be a U.S. citizen, a U.S. national or a U.S. resident alien.
Residence Test: The child must have lived with you for more than half of the tax year for which you claim the credit.
Family Income Test: The child tax credit is reduced if your modified adjusted gross income is above the amounts, which are determined by your tax-filing status above.
Death of Family Member
If you have a family member who died during 2014, you might be required to file a return for him or her. Report income earned from the beginning of the year to the date of death on that person’s final return. A legal entity called an estate is automatically created at the time of the death. This ensures all income the deceased earned is accounted for. On the estate return (Form 1041), report any income received after the date of death. This includes income earned from bank accounts or stocks while the estate is in probate. The estate must request its own employer identification number to use for filing purposes.
You or a representative should let all payers of income know of the death. You should include financial institutions in your notifications. This will ensure you report all income your family member’s estate or heirs earn.
Many assets, like a life insurance policy or brokerage account, list a beneficiary. If they do, these assets can bypass probate and be paid directly to the beneficiary. Usually, money paid out from assets that do this is not taxable. So, interest earned on these assets after the death of your family member is taxable.
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