Tax Returns Tax Credits and Qualifying Children & Persons

People work hard to earn money at work. Fortunately, tax credits are available to certain taxpayers which can limit the amount paid to the Internal Revenue Service (IRS). It can be a difficult process to determine which tax credits are available from the IRS / federal tax code and there are pitfalls if a taxpayer is too liberal. If a taxpayer takes a tax credit for which they were not entitled to take, they may face significant fines and interest from the IRS.

Understanding Tax Credits and Tax Deductions


Tax credits are not the same as tax deductions. Qualified tax deductions are subtracted from a taxpayer's income making less income subject to taxation. Tax credits reduce the amount of tax that is actually owed by the taxpayer. Tax credits usually provide a greater net reduction of the amount of tax a taxpayer is ultimately required to pay.

In order to determine your tax liability, a taxpayer must first calculate the taxpayer's gross income for the year. Next, the taxpayer applies tax deductions the taxpayer is entitled to take (such as itemized deductions or standard deductions.) The tax deductions are subtracted from taxpayer's gross income leaving the taxpayer with their "adjusted gross income" or AGI. Using the AGI and a tax table from the IRS, the amount of income tax the taxpayer is required to pay can be determined. If the taxpayer is entitled to also take tax credits, those tax credits are subtracted from that amount the taxpayer was required to pay. Since tax credits are subtracted directly from the amount to be paid to the IRS, tax credits will often work out to be much more valuable reduction of tax liability than tax deductions which are taken from gross income or "from the top."

Refundable and Non-Refundable Tax Credits


Tax credits may only be refundable or non-refundable. A taxpayer with a refundable tax credit will receive a refund if the amount of tax owed is less than the amount of the tax credit. A non-refundable tax credit does not provide for a refund – it will only reduce an amount of tax owed by the taxpayer until the tax liability of the taxpayer is zero.

Popular Tax Credits


There are a many of different personal tax credits for which a taxpayer may be entitled to take. The most popular examples are the Earned Income Tax Credit (EITC), the Child Tax Credit, the Child and the Dependent Care Credit.

A Qualified Child for Tax Credit Purposes

Many tax credits are dependent upon whether a taxpayer has a "qualifying child." In general, to be a taxpayer's qualifying child, the child must satisfy four tests:
  • Relationship – must be the taxpayer's child or stepchild (blood or adoption), foster child, sibling or stepsibling, or a descendant of any of those mentioned
  • Residence – must have the same principal residence as the taxpayer for greater than half the tax year, with only limited exceptions (such as children of divorced or separated parents, kidnapped children, children born during the tax year)
  • Age - must be either (i) under age 19 at the end of the tax year or (ii) under age 24 if a full-time student for no less than five months of the tax year or (iii) permanently and completely disabled at any point during the tax year
  • Support – must not have provided more than one-half of his/her own support for the tax year

The Earned Income Tax Credit – EITC or EIC


The Earned Income Tax Credit (EITC) is a refundable tax credit that is available to individual taxpayers and families who are in the low to middle income range – it is a credit for people who don't earn a great deal of money. The EITC tax credit is dependent upon the taxpayer's income and subject to the following requirements:
  • the taxpayer must have income earned as a result of work or employment and does not include income received from investments
  • married couples must file jointly, separate filing is permissible only in very limited circumstances
  • the taxpayer claiming the credit cannot be a "qualified child" of another person
  • if the taxpayer does not have their own qualifying child then they must be at least twenty five years old and not older than age 64
  • the taxpayer must also have lived for more than half of the year in the US
If you need help determining whether you qualify for this tax credit, you may use the EITC Assistant provided by the IRS.

The Child Tax Credit


In order to qualify for the Child Tax Credit, the child must be a child who:
  • is the taxpayer's child, step-child, sister, brother, niece, nephew or grandchild
  • is claimed as a dependent by the taxpayer
  • has lived with the taxpayer for greater than half of the year
  • was less than 17 years old during the entire tax year
  • did not provide for more than half of his/her support for the tax year
  • is a US national, US citizen or US resident alien
Families and individual taxpayers with children may be eligible for the child tax credit, which is a refundable tax credit. The maximum tax credit per qualifying child is $1,000 but, depending on your AGI, this amount will probably be reduced. If the amount of the tax credit is greater than the amount owed in income tax, the taxpayer can apply for a refund through an "additional tax credit."

Child and Dependant Care Tax Credit


Children or disabled adult dependents may require day care. Taxpayers who incur day care expenses may be eligible for a non-refundable federal tax credit of up to 35% of the total cost. A "qualifying person" for this type of tax credit includes:
  • a qualifying child under the age of 13 who is a dependent of the taxpayer
  • a spouse that is mentally or physically unable to take care of themselves
  • any person who has lived with the taxpayer for more than half the year and who is unable to care for themselves and who is a dependent of the taxpayer
The tax credit can be calculated using IRS Form 2441 and Instructions for Form 2441.

Additional Tax Credits


There are several other tax credits that may be available to you:
You may wish to speak to your accountant or an experienced tax attorney in order to determine whether you qualify for a tax credit or other additional tax benefits.
About author
Michael Wechsler
Michael M. Wechsler is an experienced attorney, founder of TheLaw.com, A. Research Scholar at Columbia Business School and of-counsel to Kaplan, Williams & Graffeo, LLC. He was also an SVP and chief Internet strategist at Zedge.net and legal consultant at Kroll Ontrack, a leading service e-discovery and computer forensics service provider.

Comments

There are no comments to display.

Article information

Author
Michael Wechsler
Article read time
5 min read
Views
2,282
Last update

More in Tax Law

More from Michael Wechsler

Share this article

Back
Top