Tax credits for people who work
Brenda Procter, M.S. State Specialist & Instructor, Personal Financial Planning, College of Human Environmental Sciences, University of Missouri Extension
Sizeable tax credits still exist for working families — especially those with children — but up to 20 percent of eligible Missouri families still do not file for them. Families making so little that they are not required to file a tax return might greatly benefit from doing so.
Low- and moderate-income families may qualify for one or more of four federal tax credits — the Child Tax Credit, the Additional Child Tax Credit, the Earned Income Tax Credit and the Child and Dependent Care Credit. The credits’ rules overlap in some ways and differ in others, but many families may qualify for all four.
Child Tax Credit
The Child Tax Credit is a federal tax credit worth up to $1,000 per child in tax year 2011. Families must have dependent children under age 17 to get it. Millions of families became eligible last year even if they owed no taxes. The additional tax credit comes as a refund from the IRS to families making more than $3,000 in 2011.
Generally, the 2011 Child Tax Credit is available to a single or married worker who:
- is able to claim a child under age 17 as a dependent (child must live in the U.S. as a citizen or resident alien and be a son, daughter, stepchild, grandchild, adopted child, agency-placed foster child, or sibling, stepsibling, niece or nephew being raised as the taxpayer’s own)
- has had the qualifying child living in the taxpayer’s household for more than half of the year, and the child must not have provided more than half of his or her own support
- has either a Social Security number or an Individual Taxpayer Identification Number
- files IRS Form 1040 or 1040A.
The Child Tax Credit first reduces or eliminates a family’s income tax bill of $1,000 or less. Any portion that remains comes back as a refund for families making more than $3,000 in the form of the Additional Child Tax Credit (see below). The total size of the additional credit depends on the amount by which the family’s earned income exceeds $3,000, and the credit is phased out for families with adjusted gross incomes above:
- $110,000 if married filing jointly;
- $75,000 if single, head of household, or qualifying widow(er);
- $55,000 if married filing separately.
Additional Child Tax Credit
The Additional Child Tax Credit is available even if someone does not make enough money to claim the entire $1,000 Child Tax Credit. Unlike the nonrefundable Child Tax Credit portion, the refundable Additional Child Tax Credit comes in the form of a refund even if you do not still owe taxes. The size of the Additional Child Tax Credit depends on how much the family income exceeds $3,000 and is subject to the same income phase out limits as the Child Tax Credit.
Earned Income Tax Credit
The Earned Income Tax Credit is a special tax benefit for low- to moderate-income workers. It reduces their tax burden, supplements wages and makes work more attractive than public benefits. The credit can mean up to $3,094 for workers raising one child in their home, up to $5,112 for workers raising more than two children, or up to $5,751 for workers raising three or more children. Although children must meet residency requirements, a child does not have to be claimed as a dependent to qualify a worker for the Earned Income Tax Credit. Even workers without children can qualify for up to $464.
The Earned Income Tax Credit is for full-time or part-time, single or married workers raising at least one qualifying child at home — and for some childless workers. Workers must meet certain income standards. A qualifying child is a son, daughter, stepchild, adopted child, agency-placed foster child or grandchild, or
a sibling, stepsibling, niece, nephew, stepniece or stepnephew being raised as the taxpayer’s own. Any qualifying child must be under age 19, under 24 if in school full-time for at least five months during 2011, or any age if totally disabled.
- earned less than $36,052 (or $41,132 for married workers) and raised one child in their homes may be eligible for a credit of up to $3,094
- earned less than $40,964 (or $46,044 for married workers), and raised two children in their homes, may be eligible for a credit of up to $5,112
- earned less than $43,998 ($49,078 for married workers), and raised three or more children in their homes, may be eligible for a credit of up to $5,751
- are at least age 25 and under 65, who earned less than $13,660 (or $18,740 for married workers) and did not raise children in their homes may be eligible for a credit of up to $464.
To claim the credit, you must:
- have earned income from wages or self-employment
- have a Social Security number for everyone on the tax return with names and numbers that perfectly match what Social Security cards show
- file IRS Form 1040 or 1040A (must file jointly to get it if married)
- file IRS Schedule EITC, if you have qualifying children
Child and Dependent Care Credit
The Child and Dependent Care Credit is a tax benefit that helps families pay for child care while they work or look for work. It also helps workers pay for the care of a spouse or adult dependent who is incapable of self-care. It can offset taxes taken out as payroll withholding and cover what is still owed at the end of the year, depending on the size of the credit. In most cases, the credit can only be claimed for a child who is claimed as a dependent, but there are special rules for children of divorced or separated parents.
The Child and Dependent Care Credit differs from both the Earned Income Tax Credit and the Child Tax Credit in that families earning too little to pay federal income tax cannot take the Child and Dependent Care Credit. The Child and Dependent Care Credit is between 20 and 35 percent of expenses up to $3,000 for one child or dependent, or up to $6,000 for more than one child or dependent. It can mean a credit up to $1,050 for families with one child or dependent in care, or up to $2,100 for families with more than one child in care.
Families can claim the Child and Dependent Care Credit if:
- they paid for care in 2011 for a child under age 13 or a disabled adult who lived with them, and they had earned income during the year
- they file IRS Form 1040 or 1040A
- they paid more than half the cost of keeping up their home (rent, food, etc.)
- they needed the care to work or look for work (both spouses must need the care in a two-parent family, unless one is a full-time student or disabled)
- they file Form 2441 (if they use a 1040) or Schedule 2 (if they use a 1040)
- the amount they paid for dependent care in 2011 was less than their income for the year (for married couples filing jointly, the care must have cost less than the income of the lower-earning spouse)
For a free, easy-to-understand tax credit outreach kit, contact:
The Center on Budget and Policy Priorities
820 First Street, NE, Suite 510
Washington, DC 20002
The kit includes detailed worksheets, outreach strategy ideas, flyers, posters, brochures in English and Spanish, and an envelope stuffer.
Also go to the Internal Revenue Service website at http://www.irs.gov/ or call 1-800-TAX-1040 for detailed eligibility rules, brochures and filing forms.