Tax Question – Exemption for child

Question: When “claiming” the kids, is it $2600 per dependent, and is that a “reduction” in taxes paid or just a simple “credit?”

Answer: The 2012 personal exemption is $3,800 per dependent.  This is a reduction of taxable income.  So if you earn $100,000 in wages and you have one dependent.  Then your taxable income is reduced to $96,200 (100,000 – 3,800).

Then for children under the age of 17, you can get a credit of up to $1,000 per child in 2012.  $1,000 directly reduces taxes owed.  If the estimated tax on 96,200 is 19,240 based on a tax rate of 20%.  With the child tax credit, taxes owed will be reduced to 18.240 (19,240 – 1,000).

IRS Circular 230 Disclosure: To the extent this writing contains advice on a federal tax issue, the advice is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed in this communication.