Tax Credits for Children
Children have a major financial impact on families, especially on filing income tax returns. The Internal Revenue Service (IRS) offers several tax breaks to those with children, which can reduce taxes by thousands of dollars and potentially result in significant tax refunds or owing no taxes.
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Child Tax Credit
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The IRS offers a "child tax credit" to parents for each child under the age of 17 who is considered a qualifying dependent. As of March 2011, the credit is equal to $1,000 per child, and to be eligible, a child must be a dependent who lived with you for more than half the year and depended on you for at least half of his support. Tax credits directly reduce the amount of tax you owe, so if your tax obligation was $2,500, and you had two children eligible for the child tax credit, you would only owe $500 after the credit.
Additional Child Tax Credit
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While tax credits reduce the amount of tax owed, if the amount owed drops to zero, additional credits do not normally benefit you in any way. For instance, if your tax obligation is $800, and you have one child that is eligible for the child tax credit, your tax burden would fall to 0, but $200 of the $1,000 credit would essentially be lost. Some taxpayers may be eligible for an additional child tax credit that makes the child care credit refundable, even if credits exceed tax liability.
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Earned Income Credit
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The earned income credit is tax break that reduces the tax burden of low- and middle-income workers and families. The amount of the credit and eligibility requirements depend largely upon how many children you have. As of March 2011, married couples filing joint returns are not eligible for the credit if they make more than $18,470, while joint filers with one child are eligible if income is $40,545 or less.
Dependent Tax Exemption
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The IRS grants taxpayer's dependents a tax exemption for each child that serves to reduce taxes owed even if you don't qualify for tax credits. The dependent tax exemption reduces taxable income by $3,650 per dependent child for 2010 tax returns. The savings you will gain from the exemption will depend on your tax rate. For instance, if your tax rate was 28 percent, you would save 28 percent of $3,650 or $1022 in taxes per child.
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