The Internal Revenue Service offers married couples with children several tax credits, which reduce the amount of income tax they owe by the amount of the credit. The IRS also offers deductions and exemptions, which are different from credits in that they reduce the amount of the couple's taxable income, indirectly lowering the amount of tax the couple owe. In 2011, the IRS's personal and dependent exemption increased from $3,650 to $3,700 for taxpayers, spouses and dependent children under the age of 19, or for dependent children under the age of 24 attending college full-time. Couples may be eligible for other deductions and credits based on income, filing status and qualifying child requirements. Tax filers who qualify as dependents on another tax return cannot claim an exemption.
What Is a Qualifying Child?
To qualify as a dependent, a child must live with the couple over half of the tax year and meet the relationship test, which requires the child to be the couple's biological child, stepchild or foster child. A qualifying child also includes a descendant of the couple's biological, step or foster child. This includes grandchildren, nieces and nephews. There is an income phase-out period, which means the credit diminishes at a certain income level. For married couples filing jointly, the phase-out begins at $110,000 in 2011. Married couples filing separately will see the phase-out begin at $55,000. Credit and phase-out amounts are subject to change each year.
Child Tax Credit
The Child Tax Credit provides a $1,000 tax credit for each qualifying child under the age of 17. To receive the credit, the child must be 16 years of age or younger at the end of the tax year and must be a U.S. citizen, national or resident alien. Also, the parents must provide more than half of the child's support for the child to qualify as their dependent.
Child and Dependent Care Credit
Married couples who paid dependent care expenses can claim the Child and Dependent Care Credit provided they meet the IRS requirements. The dependent child must be 12 years of age or younger. The care must be provided to allow the parents to work or seek employment. The child must reside with the parents for over half of the filing year, a parent cannot provide the care, and the parents must have earned income from wages, salaries, tips, other taxable earnings or self-employment. This also applies to spouses who attended college full-time or were unable to care for themselves due to a mental or physical disability. The IRS allows the the credit to be up to 35 percent of the child's qualifying expenses, depending upon the parents' adjusted gross income.
Earned Income Credit
Low-income and moderate-income families may qualify for the earned income tax credit (EITC). The EITC provides a refundable tax credit to families who fall within the income guidelines set by Congress. Both spouses must have a valid Social Security number, and they must have earned income from an employer, self-employment or another taxable income source. Each spouse must be a U.S. citizen, resident alien or a nonresident alien married to a citizen for the entire tax year. Neither spouse can be a qualifying child of another person. Married couples filing separately cannot receive the earned income tax credit.
Earned Income Guidelines
Any taxpayer can claim the earned income tax credit, but married couples have a higher income threshold. Married couples with three or more children must earn less than $49,078 in the 2011 tax year to qualify. Couples cannot earn more than $46,044 with two children and $41,132 with one child. Investment income must be $3,150 or less. The maximum credit allowed is $5,751 for three or more children, $5,112 for two children and $3,094 for one child.
Education Credits and Deductions
Married couples filing jointly can claim income tax deductions of to $4,000 for tuition and fees. Like exemptions, deductions reduce taxable income. Couples do not need to itemize to claim the adjustment, but they are required to meet other qualifications. The deduction applies to college expenses for an eligible student who meets the qualifying child guidelines. The student must attend a college, university, vocational school or other formal education institutional approved by the U.S. Department of Education. Eligible expenses include books, supplies and any equipment needed to complete enrolled courses. Ineligible expenses include insurance, medical expenses, room and board, transportation or any other personal expenses. Married parents may also claim the American Opportunity, Hope and Lifetime Learning Education Credits provided they do not file separate returns, the expenses are for an eligible student, and they did not claim another education credit. To qualify, neither spouse can be a nonresident alien nor a nonresident alien who was not considered a resident alien for tax reasons.
Tax credits reduce tax due. Currently, there are two types of credits. Nonrefundable credits deduct from the tax owed and in some cases, reduce the filer's tax to zero. If these credits exceed the tax owed, the excess amount is not refunded. Refundable credits can produce sizable refunds for eligible parents. Refundable credits also reduce the tax owed, and, if the amount of the credit exceeds the owed tax, the IRS refunds the excess to the taxpayer. Examples of nonrefundable credits include the Child Credit and Child and Dependent Care Tax credit. Refundable credits include the Earned Income and Additional Child credits.
- Internal Revenue Service: Ten Facts about the Child Tax Credit; February 10, 2011
- Internal Revenue Service: Ten Things to Know About the Child and Dependent Care Credit; May 7, 2011
- Internal Revenue Service: Earned Income Tax Credit Rules for Everyone
- Internal Revenue Service: Preview of 2011 EITC Income Limits, Maximum Credit Amounts and Tax Law Updates
- Internal Revenue Service: Tuition and Fees Deduction
- Internal Revenue Service: Qualified Education Expenses
- Internal Revenue Service: Expenses that do not Qualify
- Internal Revenue Service: Publication 501: Exemptions, Standard Deduction and Filing Information
- Money Crashers: What is a Tax Credit vs Tax Deduction—Do You Know the Difference?