Getting a Tax Credit for Your KidsBy Richard A. Chapo
As you know, raising a family is a full time job and can put stress on your finances. Fortunately, you can claim a tax credit to help cut your IRS bill if you have kids.
Getting a Tax Credit for Your Kids
With a tax deduction, you are reducing the total amount of adjusted gross income you have. For instance, if you earned $50,000 dollars in 2005 and take a $1,000 deduction for something, you’ll have to pay tax on $49,000 dollars in earnings. Put another way, the $1,000 tax deduction will save you a hundred dollars or so in the amount you have to send to the IRS.
A tax credit is a beautiful thing. It is designed to reduce the amount of taxes you on a dollar for dollar basis. Taking our example above, you would not deduct a $1,000 tax credit from the $50,000 you earned. Instead, you would go to the tax tables and determine the amount of tax you owe on the $50,000. Let’s say the tax tables reveal you owe $9,000. You would reduce this amount by the $1,000 tax credit and pay $8,000 dollars to Uncle Same. Put another way, tax credits are tax deductions on steroids!
If you are raising children, you may be able to claim a tax credit for each one. They must be under 17 at the end of the tax year, a U.S. citizen, your child and a dependent. Adopted children fit within the tax credit as do stepchildren and certain foster children.
This tax credit, however, does have some limitation. The primary issue is something called the phase out. If you make more than a particular dollar figure, the tax credit is either reduced or eliminated depending upon your particular circumstances. The phase out start when your adjusted gross income exceeds the following amounts:
1. Married filing Jointly: $110,000
2. Married filing Separately: $55,000
3. All Other Designations: $75,000
It is important to keep in mind that this tax credit is not a profit center. If you owe the IRS $4,000, but can tax a tax credit for 5 children, you will not get $1,000 back from the IRS. Instead, you tax bill is simply canceled out.
