Tax Consequences of Earned Income Tax Credit and Dependent Exemptions
For divorced couples with children, it is important to understand the differences between the Earned Income Tax Credit and dependent exemptions.
The general difference is that an exemption reduces your taxable income directly, while a credit reduces your tax liability.
The dependent exemption allows you to exclude a certain amount of income from your taxable income for each of your dependents. For the 2017 tax year, you can deduct $4,050 for each dependent.
The Earned Income Tax Credit (EITC) works a bit differently. Instead of providing an exemption, it offsets the tax you owe on a dollar-for-dollar basis. The EITC is a benefit for people who work but make low to moderate income. The EITC may be available to you even if you did make enough to have to file taxes for that particular year. This option is available to you as long as you have a child who will be younger than 17 at the end of the year. If you are eligible to file for the EITC, it may reduce the amount you owe in taxes and may even give you a refund.
If you meet the requirements for each, you may claim the dependent exemption as well as the child tax credit for that dependent on your tax return.
Qualifying for the exemption
For you to claim a dependent exemption, you must meet the following five requirements:
- The dependent is a citizen or a resident of the United States, Canada or Mexico for at least part of the year.
- You have a gross income of at least $4,050.
- The dependent is a relative or a member of your household for a whole year.
- The dependent will not be filing a joint return with a spouse.
- Your dependent receives at least half of his or her total support from you.
To learn more about the Earned Income Tax Credit, dependent exemptions and how they could affect your taxes, work with a trusted family law attorney at Fox & Associates Co., L.P.A.