Your children may hold key to tax relief

By Steve Rosen
Knight Ridder News Service

Still working on your tax returns? The good news is that some of those expenses you ran up on your kids last year could provide some big savings.

Also, a host of college savings plans offer tax benefits, no matter how small your nest egg. And look into opening a retirement account for your child if he or she earned income from a job in the past year.

Here are a few tax strategies that might apply:

• Child tax credit: You can claim a $600 tax credit for each child younger than 17 that you claim as a dependent. This covers any child, stepchild, foster child or grandchild whom you claim as a dependent, said Julie Welch, a tax accountant in Kansas City, Mo., and co-author of "101 Tax Savings Ideas."

• Dependent care credit: To qualify, you must pay daycare expenses for your dependent while you are at work. Your dependents must be younger than 13 or physically or mentally disabled. Typical expenses include daycare services, nursery schools, baby-sitters and maids.

Depending on income limitations, you generally can claim a credit equal to 20 percent to 30 percent of your expenses up to $2,400 for one child, and $4,800 for two or more.

• Adoption expenses: The tax credit for adopting a child is now $10,000, up from $5,000 in 2001. The credit phases out if your adjusted gross income rises above $150,000 for a married couple filing jointly.

Among the expenses covered are adoption fees, court costs and attorney fees. Expenses not covered include those for the adoption of your spouse's child, Welch noted. She also said expenses for adopting a foreign child are only eligible if the adoption becomes final.

Generally, Welch said, you claim the credit in the year after the year you paid the expenses. So if you paid adoption expenses in 2001, you would claim the credit on your 2002 return.

• Special schools: You may be able to claim certain medical deductions, such as the tuition for a special school or tutoring for learning-disabled children, according to the editors of "J.K. Lasser's Year-Round Tax Strategies." But remember, the deductions are subject to income limitations.

• Student loan interest: The maximum you can deduct is $2,500 of student loan payments made in 2002, up from $2,000 in 2001. Congress also has eliminated a provision that allowed the deductions only on interest paid during the first five years.

The deduction phases out for married couples filing jointly with adjusted gross income of $100,000 to $130,000. For single filers, the phase-out occurs between $50,000 and $65,000.

• Education expense deduction: You can deduct up to $3,000 annually in college tuition and fees you paid for yourself, your spouse and any other dependents. The deduction, like the student loan interest deduction, can be taken whether you itemize or not, according to H&R Block's Tax Planning Advisor.

• Lifetime learning and Hope scholarship credits: You can offset the costs of higher education by using these two credits.

The Hope credit amounts to 100 percent of the first $1,000 of a student's annual tuition and fees, plus 50 percent of the next $1,000, for a total of $1,500. But the credit can only be claimed for two tax years for any one student, so the maximum overall credit is $3,000. There also are income and other eligibility restrictions.

The lifetime learning credit, on the other hand, is available for an unlimited number of years. For 2002, the credit equals 20 percent of qualifying tuition and fees up to $5,000, for a maximum credit of $1,000 per year.