Children and Taxes Part III – Less Common Credits

Earned Income Tax Credit

The Earned Income Tax Credit was established to provide a benefit for working individuals and families that have low to moderate income. The tax credit reduces the amount of tax owed dollar for dollar and is also refundable. Like a lot of other credits, the taxpayer’s filing status cannot be married filing separately. To qualify the taxpayer cannot be a qualifying child of another person and must have earned income. Earned income is considered to be wages and salaries from an employer or income from running your own business.

To qualify for the earned income credit in 2014 adjusted gross income cannot exceed $46,997 for single and head of household filers and around $52,427 for married filing jointly filers. The maximum credit allowable, shown below, is increased significantly by having at least one qualifying child. For 2014 the maximum credits are:

  • $496 with no qualifying children
  • $3,305 with one qualifying child
  • $5,460 with two qualifying children
  • $6,143 with three of more qualifying children

Adoption Credit

At the beginning of 2013 the adoption credit was made permanent, but it was put into law as a nonrefundable credit. For tax years 2010 and 2011 the credit was refundable (which we hoped as tax professionals would continue). The tax credit for 2014 is up to $13,190 and any unused credit can be carried forward 5 years to offset future tax liability. The income limits are more generous than most IRS credits with $197,880 of income being the maximum allowed before being phased out and eliminated if income exceeds $237,880. The Adoption Credit is claimed on Form 8839, Qualified Adoption Expenses on the individual tax return.

Qualified adoption expenses are amounts reasonable and necessary to legally adopt a child. These can include:

  • Court costs
  • Attorney fees
  • Traveling expenses including meals and lodging

There are a couple of uncommon features of the credit that can provide benefit for special situations. Even if expenses are incurred and the adoption is not finalized the credit may still be claimed. The exception to this is that a foreign adoption can be claimed only if the adoption becomes final. For a special needs child the full credit may be claimed even if there were no qualified adoption expenses.

As represented above the rules and qualifications for the earned income tax credit and adoption credit can be confusing so we suggest consulting a tax professional if you believe you may qualify.