Posted on March 01, 2006 at 18:26:51:
No question, most parents would say: the $3,200 personal exemption for a child is very valuable. But not always. Two issues should be considered: are tax credits available that are worth more than the exemption, and might the exemption be phased out?
The $3,200 exemption saves about $1,200 for parents in the 35-percent bracket. However the Hope credit is worth up to $1,500 and the Lifetime Learning credit up to $2,000. The credits are phased out as adjusted gross income rises from $43,000 to $53,000 for singles, and from $87,000 to $107,000 for couples, so it can be better to forgo the exemption and let the child take the credit.
Similarly, if the parents’ high income bars or phases out the value of the exemption – from $149,950 to $268,450 on a single return, or $218,950 to $341,450 on a joint return – why not let the youngster claim the dependency exemption on his own tax return, plus any applicable credits?