This article explains the different ways to get tax relief if you have children. It includes some basic definitions and the rules that apply to each deduction or credit.

What is an income tax deduction?

An income tax deduction is an amount of money subtracted from the income that you will have to pay taxes on (your taxable income). An example of a tax deduction is the money that you pay for child care.

What is a tax exemption?

A tax exemption is a deduction allowed to a taxpayer because of his or her status (having certain dependents, being blind, or being over 65, etc.). Like deductions, exemptions reduce the amount of income on which you will have to pay taxes. In 2007, the dependent exemption was worth $3,400, meaning that $3,400 of your income will not be subject to income tax.

What is a tax credit?

A credit is a dollar-for-dollar reduction of tax. (See What credits are available if you claim your child as a dependent?.)

When parents are divorced or separated, which parent may claim the children as dependents?

The parent with whom the child lives for more than 50% of the time during any tax year, is entitled to claim the child as a dependant exemption for all tax purposes. Each child counts as one exemption. For a child to qualify for exemption purposes, he or she must be:

• Under the age of 19 at the end of the year, unless the child is a full-time student or disabled;
• Under the age of 24 if a full-time student; or
• Any age if permanently and totally disabled.

What does it mean to file as head of household?

Only the parent who cares for the child or children more than 50% of the time may file as head of household. Certain credits, such as the child care credit and the increase in the earned income tax credit, both described below, are only available to the parent who has filed as head of household.

What credits are available if you claim your child as a dependent?

• Child tax credit: A parent who is entitled to claim the dependent exemption, is also eligible to claim the child tax credit. This credit reduces the amount of tax due. (If you do not owe tax, however, this will not result in a refund.) The child tax credit is worth up to $1,000 for each child under the age of 17 at the end of the year. To be able to claim the child tax credit, you must be able to claim the exemption for the child and have taxable earned income above $10,750.You can claim this credit whether or not you are a U.S. citizen. However, the residency requirements described below for your child apply to this credit. In order to claim this credit, you must file Form 1040 or 1040A (not 1040EZ).
  
  
• Additional child tax credit: If you are able to claim the dependent exemption, you may also take advantage of the additional child tax credit. The additional child tax credit is similar to the child tax credit, except that it is specifically for the low-income taxpayer. For this reason, you can get a refund, as opposed to simply not having to pay taxes. The same residency requirements apply. However, in addition to Form 1040 or 1040A, you must also submit Form 8812.
  
  
• Child care credit: The credit for child care expenses is a percentage of your child care costs while you work or look for work. A non-custodial parent cannot claim the child care credit, even if he or she is able to claim the child as a dependent and take the dependency exemption on his or her tax return. In order to claim this credit, you must file Form 1040, Form 1040A, or Form 1040NR. You must also meet all of the following requirements:
  • The care you pay for must be for one (or more) of the dependents that you are able to list as an exemption on your tax forms.
  • You must have earned income during the year.
  • You must pay child and dependent care expenses so that you can work or look for work.
  • If payments are made to an older sibling, the sibling cannot be your dependent and must be over the age of 19 by the end of the year. Payments cannot be to your spouse or the other parent of the child.
  • Your filing status must be single, head of household, qualifying widow(er) with a dependent child, or married filing jointly.
  • You must identify the care provider with a Social Security or taxpayer identification number.
    
    
• Earned income tax credit (EITC): The last credit that will be increased when you claim a dependent is the earned income tax credit. This credit, worth anywhere from $3 to over $5,000, is available to the parent with physical custody of one or more children. You must have earned income of less than a certain amount, and the qualifying child must be under the age of 17. For the year 2007, you can claim the earned income tax credit if your income was no more than:
  • $37,783 ($39,783 married filing jointly) with two or more qualifying children;
  • $33,241 ($35,241 married filing jointly) with one qualifying child; or
  • $12,590 ($14,590 married filing jointly) with no qualifying children.

I am the non-custodial parent, and I do not have primary custody of my child. Can I still claim her as a dependent?

Generally, the right to claim a child as a dependent is automatically assigned to the custodial parent. However, if the custodial parent signs a written declaration (Form 8332), which states that he or she will not claim the child as a dependent for the year, and you (the non-custodial parent) attach this statement to your tax return, then you may claim the deduction for the child.

The dependent exemption can be released to you for one year or for multiple years. For each year it is released, you are entitled to the dependent exemption. You are also entitled to other credits, such as the child tax credit and the additional child tax credit. This is different from filing as head of household, which you (the non-custodial parent) cannot do. As the non-custodial parent, you are also not able to claim the credit for child care expenses, or for the increase in the earned income tax credit.

I have primary custody of my child, but I agreed to let the other parent claim our child as a deduction. Can I still claim the child care credit?

Yes. the child care credit can only be claimed by the parent who has primary custody—regardless of whether that parent has claimed the child as a dependent exemption. The other credits can be claimed by either parent,

Are there residency requirements for me, or for my child?

Yes. Your child must be a U.S. citizen, U.S. resident alien, U.S. National, or a resident of Canada or Mexico for some part of the year. You do not have to be a citizen in order to claim these deductions.

Taking deductions and getting credits for dependent children is one way to reduce your taxes. But it is important to remember that the non-custodial parent cannot claim head of household filing status, and cannot get credit for child care expenses or the earned income tax credit. Head of household status and those credits are determined solely by the percentage of time the child lives with a parent, and cannot be changed by a state court order or other agreement between the parents.

If the non-custodial parent is paying a high rate of child support, or exercising more than usual visitation, it may make sense to give him or her the right to claim the children as deductions. Another consideration might be which parent would benefit more from the tax deduction. When there is more than one child, each parent can claim one or more of the children.