Dependent children may save you taxes because you can claim an exemption for each. In 1996, this exemption is $2,550. It will be adjusted for inflation in 1997. When parents are divorced, generally, the custodial parent can claim the exemptions for the children. However, this rule doesn't apply when a multiple support agreement or a pre-1985 agreement designates otherwise or when the custodial parent releases the exemption to the non-custodial parent.

You also may claim exemptions for yourself (as long as you are not someone else's dependent), your spouse (on a joint return), and each of your other dependents.

Who Is Your Dependent?

Your dependent is anyone who:

1. Has less than $2,550 of gross income for the year (not including children who are under 19 or full-time students under age 24). This amount will be adjusted for inflation for 1997.
2. Receives more than 50% of his or her support from you (some exceptions apply);
3. Is a relative (the tax law lists the allowable relationships) or lives in your home and is a member of you household for the entire year;
4. Does not file a joint return with a spouse (with the exception for certain married children); and
5. Is a United States citizen, nationalist, or resident; a resident of Canada or Mexico at some time during the year; or an alien child adopted by and living with you as a member of your household for the whole year.

Exemptions are reduced 2% for each $2,500 (or fraction thereof) that your adjusted gross income exceeds a threshold for you filing status. The 1996 thresholds are $176,950 for married filing jointly; $147,450 for head of household; $117,950 for single; and $88,475 for married filing separately. These thresholds will be adjusted for inflation for 1997.

• Beginning in 1997, you will need to show a Social Security number on your tax return for any dependents you claim, regardless of age.
• Your parent or other relative need not live with you to qualify as your dependent.
• If you and your siblings provide your parent or another relative with more than half of his or her support for the year, but none of you individually meets the support test, one of you may still claim the exemption, if otherwise qualified. The person claiming the exemption must provide more than 10% of the parent's (or other relative's) total support. The others providing more than 10% of the support must sign a "Multiple Support Declaration" agreeing not to claim the exemption that year.

If you adopt a child in 1997, you may be able to take advantage of another new tax break - a new $5,000-per-child tax credit for qualified adoption expenses ($6,000 in the case of certain qualifying special needs adoptions). Starting this year, you also can exclude from your income certain employer-provided adoption assistance of up to $5,000 per child ($6,000 for special needs adoptions). Both the credit and the exclusion are phased out ratably for taxpayers with modified adjusted gross income (AGI)) above $75,000, family tax saving.

To help you take advantage of your child's lower tax bracket, you might consider the following strategies:

• Give you child age 14 or older income-producing property. For the 1996 tax year, the 15% tax rate applied to the first $24,000 of a single person's income. (This amount will be adjusted for inflation for 1997.) Annual gifts of $10,000 or less to each individual are gift-tax-free. When your spouse agrees to "split" a gift, you can gift $20,000.
• Be alert to the "kiddie tax," a tax levied at your top rate on your under-age-14 child's unearned income over $1,300 in 1996. (This amount may be adjusted for inflation for 1997.) Think about limiting gifts to younger children to assets that will yield $1,300 or less taxable income annually.
• If you own an unincorporated business, you may be able to improve the family's tax situation by hiring your children to work for you. In 1996, a dependent could earn up to $4,000 of wages tax-free because of the standard deduction. You will be able to deduct the child's wages as a business expense, and he or she will pay tax on any income over the standard deduction amount at his or her own rate. Moreover, no Social Security or Medicare taxes apply to an under-age-18 child's wages paid by an unincorporated business.

Here's how what you spend your money on can affect your 1996 taxes. Every expense you can deduct on your tax return lowers your taxes. So knowing what expenses and how much of those expenses you may deduct is crucial to effective tax planning.

Deduction floors - Certain expenses are deductible only to the extent they exceed set income "floors." For example, medical expenses are deductible only when they exceed 7.5% of your AGI and miscellaneous deductions must exceed 2% of AGI. If you are close to these income floors, try to bunch payment of as many expenses into one tax year as possible to secure a deduction. It may help to charge some payments of deductible expenses. If you use a credit card, payment is generally considered made in the year you make the charge.

Long-term care expenses - Beginning in 1997, premiums paid for long-term care insurance that do not exceed specified dollar limits (for example. $2,000 a year for taxpayers ages 61-70, $2,500 for those over 70), as well as un-reimbursed expenses for qualified long-term care services, are deductible as itemized medical expenses subject to the 7.5%-of-AGI floor.

In addition, benefits received under a qualified long-term care insurance contract issued after December 31, 1996, are generally not taxable up to a cap of $175 a day( to be adjusted for inflation after 1997). (Earlier contracts must meet certain state requirements.) Qualifying long-term care benefits paid under an employer-provided pan are also excludable from income. However, employees may not exclude benefits provided through a cafeteria plan, and expenses for long-term care services may not be reimbursed under a flexible spending arrangement.

• If you have a non-qualifying long-term care insurance policy issued before 1997, you may want to exchange it for a qualifying policy. Such exchanges may be made tax-free prior to January 1, 1998.

Self-employed health insurance - For 1997, the deduction for the health insurance expenses of self-employed individuals and their spouses and dependents is increased to 40%, from 30% in 1996.

Investment interest expense - Investment interest includes interest you pay your broker on a margin loan and interest you pay on other loans that enable you to hold investment assets. This interest is deductible up to the amount of your net investment income. You can carry over any excess interest expense and deduct it in later years, subject to the same limitation.

• To increase your net investment income, you may elect to include all or part of your net capital gain in the total. But, by making the election, you sacrifice the favorable maximum 28% capital gains tax rate on that gain. This will not be a problem if your marginal tax bracket is 28% or less. If it's higher, you'll want to further analyze your tax situation to see whether making the election will be beneficial to you.

Charitable contributions - Giving to qualified charities can cut your taxes significantly. To claim a deduction for a gift of $250 or more, you'll need a written receipt containing specific information. And remember: If you receive goods or services in exchange for your contribution, you can deduct only the "gift" portion of your contribution. The gift portion is the amount exceeding the value of those goods or services. When your total donations other than money are greater than $5,000 ($10,000 for certain publicly traded securities), you'll need to attach an appraisal summary to your tax return.

• Instead of making a cash donation, consider giving appreciated property you've owned more than one year. You'll avoid capital gains tax on the property's increase in value and you can deduct the full fair market value of the property within tax law limits,
• Setting up a charitable remainder trust can give you substantial tax breaks while you're benefiting a favorite charity. You transfer assets - preferably highly appreciated assets - to the trust and receive an income from the trust for life or a period of years. At your death or when the trust term ends, the trust assets pass to the charity you've selected. When all requirements are met, you can deduct the value of the charity's future interest in the property as a current charitable donation. If the trust sells the assets, it will pay no capital gains tax. This can give you a larger income. Moreover, the assets you contribute escape gift and estate taxes.
• Selling an asset that has lost value and donating the proceeds may be preferable to donating the asset itself. You may generate both a deductible capital loss and a charitable deduction. Donating the property would give you a deduction for its market value on the date of the gift, but you'd get no tax benefit from the property's decline in value while you owned it.

Taxes - You generally may deduct most state, local and foreign income or real estate taxes and state and local personal property taxes. Paying your last quarterly state-tax estimate before the end of the year or increasing the withholding from your compensation late in the year are ways to increase your 1997 deduction for taxes.

The following chart shows the average itemized deduction claimed on 1994 federal income-tax returns (the last year available) in each income (AGI) range. Remember, you can only deduct what you actually pay! This list is not a formula for schedule A tax deductions.

	$30K-$39K	$40K-$49K	$50K-$74K	$75K-$99K	$100K-$199k
TAXES	$2,815	$3,367	$4,421	$6,620	$9,773
CONTRIBUTIONS	$1,392	$1,536	$1,716	$2,315	$3,420
INTEREST	$5,134	$5,667	$6,345	$7,746	$10,288