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For most of the year, your kids are costing you. But tax-time is payback, when kids and other people you support become tax deductions. They’re called dependents: people you support. For tax year 2008, every dependent you claim reduces your taxable income by $3,500. And every $3,500 off your income could put $1,000 in your pocket.
It’s not child’s play to understand who’s a dependent and why: the rules are complicated, and they change. Example? In 2005, the IRS said to claim kids as dependents, they had to be yours. But in 2007, they backed down: now you might be able to deduct any kids you support, including someone else’s.
“My girlfriend lives with me and has children. And I furnish all of their support. In 2005, I lost their dependency. With this change, I’ll be able to claim those children again as long as my girlfriend does not have any income and does not file a tax return.”
-Hal Roberts H&R Block
That’s a big change. And it gets better. Because you can use a 1040X.. .an amended return… to change 2005, 2006 and last year too.
This change could literally be worth thousands. So if you’re fully supporting kids that aren’t yours, or did in the last few years, talk to a pro.