Let's discuss tax credits related to children

I thought it might be helpful to have a discussion about tax credits related to children.  The topics we'll discuss will be the Earned Income Credit (EIC), child and dependent care credit and the Child Tax Credit (including the Additional Child Tax Credit).  I'll spread the discussion out over several posts so I can provide some detailed information and avoid a long dense article.  Let's start with a discussion of the EIC and who qualifies to take the credit.

First let's define what the Earned Income Credit is.  The Credit is a refundable credit for low income individuals, typically those with a qualifying child although it is possible to claim the credit if you do not have a child.  You may be wondering what a "refundable credit" is.  Well a non-refundable credit is one that offsets the tax liability only, once your tax liability is at zero you can no longer gain benefit from the credit.  So that means a refundable credit is one where you still benefit from the credit even if your tax liability has reached zero.  The EIC is allowed only for a 12 month tax year unless the return is for a deceased taxpayer.  Taxpayers with investment income of more than $3,150 for 2011 or filing Form 2555 (2555-EZ) with foreign earned income do not qualify for the credit.

Qualifying Taxpayer

A qualifying taxpayer (and spouse if filing jointly) must have a valid Social Security number.  A qualifying child must also have a valid SSN.  Adoption and individual taxpayer identification numbers do not qualify for the credit (ATIN's and ITIN's). If a SSN is labeled as "not valid for employment" that SSN also does not qualify, but a number labeled "valid for employment with DHS (or INS) approval" does qualify.  The taxpayer must also be a US Citizen or resident alien.  A non-resident alien married to a US Citizen (or resident alien) may also qualify if they elect to be considered a resident for the entire year by filing a joint return.  The filing status of Married Filing Separately does not qualify.  A taxpayer who is a qualifying child of another is not allowed to take the credit.

A taxpayer without a qualifying child must meet all the requirements listed in the previous paragraph and they must also meet the following requirements.  At the end of 2011 must be between the ages of 25 and 65 and cannot be the dependent of another person.  The taxpayers principal place of residence must be in the US for more than half the year, this does not include US possessions such as Puerto Rico.

We've discussed in this article the qualifications to claim the Earned Income Credit.  In the next post we'll dive into a discussion of the definition of a Qualified Child.  The EIC is a Credit that is often abused and for that reason an area the IRS is focusing on.  It is in your best interest to understand the requirements of the Credit prior to making a questionable claim.  If you have any questions before then please let me know.