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Events In Life That Have A Significant Tax Impact Series: Having A Child

Having a child is another event in life that can significantly impact your tax situation. Unlike some of the other events we will talk about in this series, having a child almost always is beneficial for your tax situation. If you understand and take advantage of the tax benefits of having a child, you will usually be able to reduce the amount of taxes that you owe. Having a child may qualify you to receive a number of tax credits such as, the Earned Income Credit, Child Tax Credit and Dependent and Child Care Expense Credit for your child.

Earned Income Credit

 The Earned Income Tax Credit is a refundable tax credit for low to moderate income working individuals or families. The maximum earned income tax credit that you can receive in 2012 for three or more qualifying children is $5,891, $5,236 for two qualifying children, $3,169 for one qualifying child, and $475 for no qualifying children. In order to qualify for the credit, you must meet certain requirements and file a tax return, even if you do not owe any taxes or are not required to file a return. To qualify to receive the Earned Income Tax Credit, you must have earned income from employment, self-employment or another source and meet certain rules. Also, you have to either have a child that meets all the qualifying child rules or meet additional rules for workers without a qualifying child. In order for your child to meet the qualifying requirements, they must pass all of the relationship, age, residency, and joint return tests established by the IRS.

Child Tax Credit

In 2011, if you qualify for the child tax credit, you may be able to reduce the amount of taxes you owe by $1,000 for each qualifying child under the age of 17 at the end of the tax year. A qualifying child must be claimed as your dependent, under the age of 17, must be your son, daughter, adopted child, grandchild, stepchild or eligible foster child, your sibling, stepsibling or their descendant, and is a U.S. citizen or resident alien.  The qualifying child must have lived with you for more than half of the calendar year. Exceptions to the time lived with you requirements are :

  • A child is considered to have lived with you for all of the calendar year if the child was born or died in the calendar year and your home was this child’s home for the entire time he or she was alive.
  • Temporary absences by you or the child for special circumstances, such as school, vacation, business, medical care, military service or detention in a juvenile facility, count as time the child lived with you.
  • There are also exceptions for kidnapped children and children of divorced or separated parts. For details on these exceptions see Form 1040A instructions.

You must reduce your child tax credit if either of the below apply:

  • Your modified adjusted gross income is above:
    • $110,000 if married and filing jointly
    • $55,000 married but filing separately
    • $75,000 if single, head of household or a qualifying widow(er)
  • Any income tax you owe as well, as any alternative minimum tax that you may owe, can affect the amount of child tax credit you can claim.

If the amount of your Child Tax Credit is greater than the amount of income tax you owe, you may be able to claim the Additional Child Tax Credit.

Dependent and Child Care Expenses

An individual that pays someone to care for their qualifying child, under the age of 13, or their spouse, or any dependent who is physically and mentally incapable of their own care, while working or looking for work may be able to claim the Child and Dependent Care Expenses Tax Credit. The credit allows you to claim $3,000 in dependent care expenses for one qualifying dependent and $6,000 for two or more qualifying persons. In order to claim the expenses and receive the tax credit, you must fill out Form 2441, Child and Dependent Care Expenses, and either file Form 1040A or Form 1040.

Tune in next week as we discuss:
"The tax impact of losing your job"

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