Every year, the IRS updates tax laws to account for inflation, and this year is no different. In 2014, parents, in particular, will find several tax-related changes that may affect their credits and deductions on their 2014 taxes.
Remember, changes to tax law for 2014 won’t affect you until you file your 2014 taxes in 2015. The taxes you’ll file by this April will be under the 2013 rules.
Here are a few of the major changes that may affect you, as a parent, in 2014:
1. Updates to the Kiddie Tax
The so-called kiddie tax was introduced in the 1980s to keep parents from shifting too much of their income to their children, so that the income would be taxed at the child’s (likely much lower) marginal tax rate.
This tax doesn’t apply to a child’s earned income, such as the proceeds from a part-time job. That income will always be taxed at the child’s marginal tax rate, which is 10 percent for most kids working at minimum wage.
But when parents funnel unearned income, including income related to stocks, bonds, mutual funds and real estate, through their children, any of this unearned income over a certain amount will be taxed at the parents’ marginal tax rate.
The kiddie tax applies to all children younger than 19 who have at least one parent living at the end of the tax year. Children between ages 19 and 23 who are full-time students and who do not earn at least half of their support-related expenses are also subject to the kiddie tax.
As long as a child meets this criteria and does not file a joint tax return as a married person, you’ll need to be careful of the kiddie tax. In 2014, the limit on unearned income a child can take home before incurring the kiddie tax is $1,000.
2. Alternative Minimum Tax for Children Subject to the Kiddie Tax
If your child is subject to the kiddie tax, you’ll figure out his/her Alternative Minimum Tax Exemption by taking the lesser of the AMT exemption for a single taxpayer, or the child’s earned income pus $7,250 (up from $7,150 in 2013).
3. Child Tax Credit
Those bundles of joy can mean bundles of refunds on your taxes, as most parents are aware. In 2014, the child tax credit value used to determine the amount of the credit that may be refundable (that is, the IRS can give you money back for it) is $3,000, the same as 2013.
4. Adoption Tax Credit
If you’re thinking of adopting a child in 2014, you should know about the tax credit. In 2014, the maximum credit for adopting a child with special needs is $13,190. The special needs adoption credit, which typically applies to harder-to-place children, including children in foster care, can be claimed regardless of your actual adoption expenses.
(Note: Check with your adoption agency to see if your adopted child qualifies as special needs. Some kids without mental or physical disabilities count as special needs, and some with mental or physical disabilities do NOT count as special needs for tax purposes.)
The maximum credit for other adoptions is your qualified adoption expenses (including attorney’s fees, agency fees, travel fees, etc.) up to $13,190.
The adoption credit, as of 2011, is not refundable. It’ll reduce your tax liability, but you won’t get a check in the mail for any leftover credits. Also, this credit begins to phase out with a modified adjusted gross income of $197,880.
5. Adoption Assistance Programs
Again, if you’re thinking of adopting a child in 2014, this might apply to you. Some employers, particularly large employers, have adoption assistance programs that allow a certain portion of your gross income to be excluded from taxes for the year.
In 2014, the maximum amount that an adoption assistance program can exclude for the adoption of a special needs child (again, double-check if your child counts as special needs for tax purposes) is $13,190. This is the same amount for the adoption of a non-special-needs child, though in this case, the maximum amount is limited to actual adoption expenses paid.
Adoption assistance programs are very similar to the adoption tax credit, but you get the money back in your pocket on the front-end, rather than waiting until you file your taxes the next tax year. If your employer offers an adoption assistance program, this is a great way to pay for your adoption expenses (or the expenses related to caring for a special needs adopted child) up front.
6. Dependent Tax Credit
For 2014, the standard deduction amount for an individual claimed as a dependent (usually, though not always, a minor or full-time-college-student child) will be the lesser of $1,000 or $350 plus the individual’s earned income.