Let's discuss tax credits related to children - Part 2

It's time to continue our discussion on tax credits related to children.  In the last post we discussed the requirements to be a qualified taxpayer for the Earned Income Tax Credit (aka. EIC or EITC).  We'll wrap up our discussion on the EITC by defining a "qualified child".

A child must meet all of the following tests for the purposes of being considered a qualified child for the purposes of the EITC:

1. Relationship  A child must be the taxpayer's son, daughter, stepchild, foster child or a descendant of any of them (ex. grandchild); or brother, sister, half brother, half sister, step brother, step sister or any descendant of any of these (ex. nephew or niece).
2. Age  The child must not have reached the age of 19 at the end of 2011 and be younger than the taxpayer (and spouse).  The child is under age 24 and a student (must still be younger than the taxpayer and spouse) the child meets the test.  Qualification is also allowed for a dependent that is permanently and totally disabled at any time during the year at any age.
3. Residency  The child must have lived with the taxpayer in the U.S. for more than half the calendar year.
4. Joint Return  The child cannot file a joint return during the year unless the return is filed solely to claim a refund.

When considering a child's eligibility to be claimed as a dependent on a parent's return the taxpayer must meet the support test (provides more than half the support of the child), for the purposes of the EITC there is no support test.  If the parents of a child do not claim the EITC on their tax return no one else is allowed to claim the credit unless their AGI is higher than the highest AGI of either parent.  As a rule only one parent can claim the EITC for a child.  In cases of divorced or separated parents the non custodial parent can claim the dependency exemption and child tax credit when certain requirements have been met.  The custodial parent claims the child and dependent care expenses, EIC and head of household status.  There are a number of different factors that come into play when considering eligibility in cases of divorced or separated parents, these cases can be complicated.  It is best that a divorce decree deal with topics of dependency exemption as well as the custody issues.  

The EITC can be a valuable credit for many lower income taxpayers.  As I've mentioned previously it is also one the IRS is monitoring closely, so it is in your best interest to be educated prior to taking the credit.  In the next post we will discuss the Child and Dependent Care Expenses Credit.  If you have any questions related to anything we've discussed please feel free to contact me.