The Dependency Exemption

• If your child qualifies as a dependent by IRS standards and if you are married and filing jointly, you may deduct a dependency exemption of $7,400 (as of 2011) from your taxable income. Since the dependency exemption for all other filing statuses is $3,700, the dependency exemption for married taxpayers filing jointly amounts to an exemption for each parent.
  
  

Dependency Exemption Restrictions

• To claim the dependency exemption for your child, she must not have provided more than half of her own support, and no one else may be entitled to claim her as an exemption. This includes your child -- if she lists herself as a dependent on her own tax return, this IRS will audit you and refuse to recognize one of the claims. Your dependent child must be either a U.S. citizen, a lawful permanent resident, a U.S. national or a resident of Mexico or Canada for at least part of the tax year. If you are a single, legally separated or divorced non-custodial parent, you ordinarily may not claim a dependency exemption for your child even if your child support payments cover all of your child's expenses.
  
  

The Child Tax Credit

• The Child Tax Credit is available to parents who are entitled to claim a dependency exemption for their child. This credit allows parents of children no older than 16 to deduct up to $1,000 from their total tax due. The credit is phased out for taxpayers with modified adjusted gross incomes of more than $75,000 (as of 2011).
  
  

Education Credits

• Two tax credits are available to custodial parents who provide educational expenses for a dependent child, although you may not use both of them for the same child during the same tax year. The American Opportunity Credit allows you to deduct up to $2,500 from your tax bill if you pay for tuition, books or related expenses for your child, as long as he is enrolled at least half-time in a post-secondary educational institution. The Lifetime Learning Credit allows you to deduct 20 percent of your expenses for your child's tuition, books and fees, up to a maximum of $2,000. You can use this credit even if your child is enrolled less than half-time.
  
  

Options for Non-Custodial Parents

• If you are a non-custodial parent (or anticipate becoming one), you and your spouse may not both claim the above-described tax breaks. The custodial parent may, however, transfer the dependency exemption to the non-custodial parent by filing Form 8332 with the IRS or agreeing to transfer the exemption in a divorce or legal separation agreement. Once the non-custodial parent obtains the right to use the dependency exemption, he becomes eligible for the Child Tax Credit and the education credits. He may not claim the exemption, however, based on expenses that were actually paid by the custodial parent.