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Also, the 2009 CCH provides special CCH Tax Briefings on key topics at: CCHGroup.com/Legislation/Briefings.
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Kids and the Tax Code: New Child Tax Credit Rules for 2008; Qualifying-child Rules in 2009(RIVERWOODS, ILL., January 2009) – Raising children can be a challenge and figuring out how to take advantage of the tax benefits for children can be as well, although both certainly have their rewards, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com). Last year, there were two changes of particular note for taxpayers with children: the lowering of the refundable child tax credit threshold as of 2008 and clarifying the definition of a qualifying child starting for 2009. Both rules were enacted as part of the Emergency Economic Stabilization Act of 2008. “The tax code as it relates to tax benefits of kids continues to be refined to ensure it’s having the intended consequences and that unanticipated loopholes are eliminated,” said CCH Senior Federal Tax Analyst John W. Roth, JD, LLM. Below, CCH reviews the new tax rules as well as provides an overview of other kid-friendly tax breaks. Lowering the Refundable Child Tax Credit FloorStarting with the 2008 tax year, the new law has changed the earned income base for the refundable child tax credit from $12,050 to $8,500. The refundable credit is equal to the lesser of either the unclaimed portion of the nonrefundable credit amount – $1,000 per child – or 15 percent of earned income over $8,500. For example, a taxpayer in 2008 has two children and an earned income of $10,000. She has no other income, is not subject to the alternative minimum tax and is only taking the child tax credit. She files as head of household, entitling her to a standard deduction of $8,000. She also is entitled to a personal exemption of $3,500 for each family member, or $10,500. As a result, she has no taxable income and no tax liability. Her nonrefundable child tax credit is $2,000 for the two children. However, because the nonrefundable credit is limited to the amount of taxes she owes, it’s zero. Under the revised law, the nonrefundable credit equals the lesser of either the unclaimed portion of the nonrefundable credit amount, which in the above example is $2,000, or 15 percent of her earned income that exceeds $8,500, which would be $225 ($1,500 x 15 percent). So, she is entitled to a refundable amount of $225. Had the threshold not been lowered from $12,050 to $8,500, she would have received nothing with an earned income of $10,000. Taxpayers with three or more children also can use an alternative formula for determining the refundable amount. “People who are eligible for several credits or have very low income were in a situation where they were not able to claim the child tax credit because they exhausted their tax liability before claiming this credit,” Roth said. “This new rule increases the potential for a greater portion of the child tax credit being refunded to individuals.” Clarifying the Qualifying-child RulesBeginning in 2009, two additional requirements are added to defining a qualifying child: A qualifying child must be younger than the taxpayer and can’t file a joint return with a spouse. “This closes a loophole that had been used by some wealthy parents. Because they would not be eligible for all the tax benefits of claiming a qualified child, they would have a younger child claim their older brother or sister,” Roth said. The new law further defines that a qualifying child for the purpose of claiming the child tax credit must be the taxpayer’s dependent. Other tax benefits of being able to claim a qualifying child can include filing a tax return as head of household; claiming the child and dependent care credit; qualifying for the earned income credit or receiving a larger credit amount; and qualifying for a dependency exemption. To be eligible for these tax benefits, other qualifications generally also apply, such as income phase-out levels. The Emergency Economic Stabilization Act of 2008 also clarified the tie-breaker rules for determining who can claim a qualifying child. Now, the tie-breaker rules apply whenever two or more taxpayers can claim a child as a qualifying child, regardless of whether they actually do so. Additionally, if the parents can claim an individual as a qualifying child, but neither does, another eligible individual can claim the child as a qualifying child. To do so, however, that person’s adjusted gross income (AGI) must be higher than the highest AGI of either of the parents. “This will have a significant impact in extended family situations. For example, a grandmother could be raising a child – the child is living primarily with her and she is supporting the child. Even if neither of the parents claims the child, the grandparent can’t claim the child if either parent’s AGI is greater than the grandmother’s,” Roth said. “Additional guidance on this rule is still to come out, but accountants and attorneys dealing with divorce settlements are going to have to get a much clearer picture of the family situation to make sure they’re complying with the tie-breaker rules.” A Review of Credits/Exemptions for KidsIn the following chart, CCH outlines the basic child-related tax credits and exemptions available as well as the rules for reporting kids’ income. Credit/Exemption
How Child’s Income is Taxed
*Parents can elect to include the unearned income of a child under the age of 19 whose income is less than $9,000 on their return by filing IRS Form 8814 along with the parents’ return. However, while combining the child’s income with the parents eliminates the need for the child to file his own tax return, it will increase the parents’ adjusted gross income and, therefore, possibly reduce the parents’ deductions or other potential tax breaks. About CCH, a Wolters Kluwer businessCCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. Among its market-leading products are The ProSystem fx® Office, CorpSystem®, CCH® TeamMate, CCH® Tax Research NetWork™, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill. Wolters Kluwer is a leading global information services and publishing company. The company provides products and services globally for professionals in the health, tax, accounting, corporate, financial services, legal and regulatory sectors. Wolters Kluwer has annual revenues (2007) of €3.4 billion ($4.8 billion), maintains operations in over 33 countries across Europe, North America and Asia Pacific and employs approximately 19,500 people worldwide. Wolters Kluwer is headquartered in Amsterdam, the Netherlands. For more information, visit www.wolterskluwer.com. -- ### --
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