The IRS sent 169,500 notices to taxpayers who claimed a personal exemption, but were also claimed on another taxpayer's return as a dependent in 2002. While dependents can lower your taxable income by as much as $3,050 for each dependent in 2003, you need to be sure to understand the eligibility requirements of dependents. Specifically, dependents must be related; not file their own tax return; be under 19 years old, earn less than $3,050 a year or be full-time students under 24 years old; and have more than half their total support during the year provided by the person who claims them as a dependent. Keep in mind that the exemption amount for dependents decreases as your income increases. The exemption for married couples filing jointly begins to decrease at an adjusted gross income (AGI) of $209,250; for single filers, it decreases with an AGI over $139,500.
Savings for the Sandwich Generation
Tax relief for the nearly 78 million baby boomers — also known as the sandwich generation because they are often raising children and caring for elderly parents — can be found in the increased dependent care credit. With more than 25 percent of American families involved in elder/parent care, this credit is especially important. "Dependents" include children under the age of 13 as well as any relative who is physically or mentally incapable of self-care, such as an elderly parent. In order to take the credit, these dependents must be claimed on your tax return and your expenses must be used to allow you to work.
The amount of the credit for 2003 is based on your adjusted gross income. Specifically, you can take a credit of 20 percent to 35 percent of the first $3,000 of dependent care expenses for one dependent (up from $2,400 in 2002) and $6,000 for two or more dependents (up from $4,800). If your AGI is under $15,000, you would be eligible for the maximum credit of 35 percent. The credit amount ranges from 21 percent to 34 percent if your AGI is more than $15,000, but less than $43,000; above $43,000 would qualify you for a 20 percent credit. For example, assuming $6,000 in expenses for two dependents and an AGI of $50,000 (20 percent rate), you could take a credit of $1,200.
Closely related to dependent care credit are flexible spending accounts (FSA), which allow you to defer up to $5,000 in pre-tax dollars for medical and dependent care expenses. However, keep in mind that dependent care expenses paid for by your FSA reduce the amount of the dependent care credit you can claim dollar for dollar.
In 2002, if your FSA allowed you to defer $5,000 and you used the maximum of $4,800 for dependent care, you would be ineligible for the dependent care credit. However, given the increase in the dependent care credit to $6,000 for two or more dependents, even if you spent your entire FSA account ($5,000) on dependent care, you would still be eligible to take a credit on $1,000 of expenses.
To provide relief from the marriage tax penalty, Congress increased the standard deduction for married couples by 17 percent, from $7,850 in 2002 to $9,500 in 2003.
This new amount is now exactly double the amount for single filers which is $4,750. As a result of this change, approximately 3 million married couples who previously would have benefited from itemizing their tax returns will save more this year by claiming the standard deduction.