Those with children can take advantage of special tax deductions not available to people without kids. The tax deduction is not dependent on how much money you make. Rather, the deduction depends on whether you can claim your children as deductions. These tax deductions can significantly reduce your gross income, giving you more take-home pay and thus providing more financial security for you and your family.
A deduction is allowed on your tax return for each dependent child you have. To qualify, your child must meet four criteria. First your child must be a blood-related child, a step child, an adopted child, a foster child, a brother or sister or a descendant of one of these, like a grandchild. Second, your child must have lived at your residence for at least half the year. Third, your child must be under age 19 at the end of the year, or under age 24 and a full-time student for at least five months out of the year or any age if he is permanently disabled. Fourth, your child must not have provided more than half of his own support for the year.
Earned Income Credit
An Earned Income Credit (EIC) is an additional deduction you are entitled to if you meet certain income guidelines. These income guidelines range between $13,460 and $43,352. The exact income limit you can make and still qualify for the credit is determined by how many children you have and whether or not you're married. For example, you may claim the EIC if you have two qualifying children, you are married filing jointly and make no more than $45,373 per year. However, the maximum income limit drops to $40,363 if you're not married or you're married but filing separately.
Tax breaks give you the benefit of an increase in your adjusted gross income. The more children you have, the more deductions you may take. An EIC provides you with additional money you may use for any purpose and is given to you in addition to the tax break you receive from your deductions.
You cannot claim your child if the child is not a qualifying child. You also cannot claim a child if the child is being claimed by your ex-spouse or someone else. If two people try to claim the same child, an IRS audit is conducted to assess who has legal rights to make the claim. The parent or guardian who does not receive the deduction once the audit is over must pay tax penalties and interest on any outstanding tax liability arising from an underpayment of tax and may be required to return any EIC that was paid out.
- IRS.gov: What is Earned Income?
- IRS.gov: EITC Income Limits, Maximum Credit Amounts and Tax Law Updates
- IRS.gov: Dependents & Exemptions
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
- IRS.gov: Earned Income Tax Credit (EITC) Questions and Answers
- Internal Revenue Service. "What’s new with the child tax credit after tax reform." Accessed Sept. 21, 2020.
- Internal Revenue Service. "Publication 972: Child Tax Credit," Pages 1, 3. Accessed Sept. 21, 2020.
- Internal Revenue Service. "Child Tax Credit and Credit for Other Dependents at a Glance." Accessed Sept. 21, 2020.
- Internal Revenue Service. "Publication 501: Dependents, Standard Deduction, and Filing Information," Page 11. Accessed Sept. 21, 2020.
- Internal Revenue Service. "Dependents." Accessed Sept. 21, 2020.
- Internal Revenue Service. "Publication 504 (2018), Divorced or Separated Individuals." Accessed Sept. 21, 2020.
- Internal Revenue Service. "Publication 501: Dependents, Standard Deduction, and Filing Information," Page 17. Accessed Jan. 28, 2020.
- Internal Revenue Service. "Publication 5334: Do I Qualify for EITC?" Accessed Sept. 21, 2020.
I am a Registered Financial Consultant with 6 years experience in the financial services industry. I am trained in the financial planning process, with an emphasis in life insurance and annuity contracts. I have written for Demand Studios since 2009.