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Tax
Talk: The Child Credit
 Auburn,
Aug. 10---We have been hearing a lot about the $300 and $600 tax
refunds. These are the short-term benefits of the Economic Growth
and Tax Relief Reconciliation Act of 2001.
What you may not be
hearing a lot of talk about is how the new tax changes can provide
financial benefits for the long term, says Robert White, a financial
specialist for Family Programs, Alabama Cooperative Extension
System.
The details of the tax
legislation are just now making their way to the public. Depending
on your taxable income, these changes may mean a lot more to you
than the much anticipated refund check. You will need to check with
a tax consultant or the IRS for information specific to your tax
situation.
Let’s look at just one
of the many changes resulting from this recent legislation.
If you have one or more
children under age 17 at the end of the tax year and your income is
at least $10,000 annually, this change should be of interest to you.
The Child Credit has been increased from $500 to $600. It will
gradually increase to $1,000 by 2010.
This credit had been
called an offset credit. That means it could be used to
offset a tax liability up to the amount of eligible credit. If you
didn’t owe taxes or owed less than the credit, you did not get the
unused portion of the credit as a refund. Now, a working family can
receive a refund in an amount equal to the lesser of the unused
credit and 10 percent (15 percent in 2005) of earnings for the year
exceeding $10,000.
Let’s look at what
this means to a family with two age-qualified children. If married
and filing Form 1040A jointly with an Adjusted Gross Income (AGI) of
$40,000, this couple would have an annual tax liability of
approximately $2,000 after standard deductions and exemptions. This
liability should normally be met through payroll withholding.
If for some reason there
is a tax balance due, the child credit can provide an offset to the
amount owed. This was the case even before the new law changes. If
for instance, the family owed $500, they were eligible for a $1,000
offset credit in tax year 2000. So any tax liability up to the
credit limit could be offset. In this example, the liability of $500
would be canceled out by the credit.
And what happens to the
balance of the credit? It would simply vanish. This is no longer the
case!
It is now possible to
receive all or part of the Child Credit as a refund, White says.
Here’s how it works. The first $10,000 of income is excluded. That
leaves $30,000 in this example. This balance is multiplied by 10
percent. We do that and arrive at a figure of $3,000. The total
Child Credit is $1,200. The law first considers the use of the
credit as an offset. So we can subtract the $500 liability from the
$1,200 credit. This leaves a balance of $700. The new law states
that a family may receive the lesser of the credit balance
(full credit if no offset) or 10 percent of AGI above $10,000. The
family in this case will receive a refund of $700.
There are income
phase-out limits starting at $110,000 AGI for joint filers, $75,000
for singles and heads of households, and $55,000 for married filing
separately. The phase out reduces the credit to zero when AGI
exceeds each applicable income level by $10,000 per child. In the
example we used, if the family income had been $130,000, that would
be $20,000 above the income level where phasing out would begin.
This would reduce the credit to zero. A slightly lower income would
mean a percentage of the credit would apply.
The important thing to
remember is that this change is new and could easily be overlooked
when filing next year’s taxes. Ask your tax consultant or call the
IRS (1-800-TAX-1040) for more information.
SOURCE: Robert White,
Financial Specialist, Family Programs, Alabama Cooperative Extension
System, (334) 844-2235
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