Both questions this week deal with declaring children as "dependents" on your income tax return. The first letter is about the advanced child tax credit issued last summer and includes the potential for "free money" for certain lucky (?) parents.
We have two children. Last summer, like a lot of parents, we received a check in the amount of $400 per child because of the tax credit going up. My question is this, how do we figure this on our 2003 tax return so we don't get into trouble with the IRS?
You are right to be concerned about calculating this correctly. It's definitely on the radar screen of the IRS. In fact, an IRS spokesperson told me it's "the" biggest error people are making this year! Through March 19, more than 2 million taxpayers have made mistakes in this area. The vast majority — 1.4 million returns — failed to subtract the advance payment which was received last summer.
First, a bit of history: tax legislation passed last year raised the child credit from $600 to $1,000 for 2003. By the end of August, nearly 24 million taxpayers had received checks for the additional credit amount ($400) as an "advance."* In other words, normally you would not receive the credit until you filed your 2003 tax return. But to boost the economy, the Bush Administration wanted to get this money into the hands of parents sooner rather than later.
If you received an advance payment of the tax credit, you have to account for this. That is, if you got a check for $400 per child, you cannot claim you are due the full credit amount ($1,000) on your 2003 tax return. All you are entitled to is an additional $600 credit.
John Battaglia, of the accounting firm Deloitte & Touche, says getting the child tax credit correctly is "very important, especially if you owe the government money." If you take a larger deduction than you're entitled to, this will understate the amount of income tax you owe. As a result, you will send in less money than you ought to.
"You can be assessed interest plus penalties if you make an error and under-pay," says Battaglia.
If, instead, you are owed a refund, the IRS will simply reduce the size of the refund you're claiming.
The IRS spells out exactly how to calculate the size of the child credit to which you're entitled. There's a simple worksheet on page 41 of the brochure that accompanies Form 1040.
If you forget how large a check you got, there's an easy way to find out by visiting the IRS website: http://www.irs.gov. Right on the home page — in big red letters (you can't miss it) — is a banner that says "Remember Your Advance Child Tax Credit?" Click on that, provide some basic details such as your Social Security number, and you'll have your answer.
Now, here's something you don't hear about every day: if the government sent you a check in error last summer, you don't have to return the money. Here's how this might have happened:
To simplify the process, the checks issued last summer were sent to anyone who had claimed a child as a dependent on their 2002 return. However, the law says only children under the age of 17 qualify for the credit. So in some cases, a parent who was eligible to take the credit in 2002 when their child was 16 years old, would not qualify for it in 2003 because the child had turned 17.
Nevertheless, Battaglia says if the IRS sent you a check in error, "you don't have to give the money back."
Consider it one of those rare times when a financial mistake works out in your favor. Or, consider it a gift from all those American taxpayers who don't have 17-year-olds in their households. It's the least we can give you!
*The maximum you could have received was $400/child, but due to income limits, not all parents received the full amount.
My wife & I have raised our 2 great-grandchildren for the past 4 years. They live with us 99% of the time and we provide all of their necessities. Our granddaughter refuses to sign over custody so I have never claimed them on our taxes. She claims them herself, however and gets the tax advantage. Can we claim these children also or will IRS deny the deduction?
Dear "e" —
Considering we're talking about the Internal Revenue Code, the rules on who is able to claim another person as a dependent are pretty straightforward.
Deloitte and Touche's John Battaglia says all you have to do is meet all three of the following tests:
1. Relationship Test: The person you are claiming must either be related to you or must have lived in your home the entire calendar year.
You pass. Great-grandchildren are clearly relatives. If someone is a relative they don't even need to live with you full-time.
2. Gross Income Test: The dependant's gross income, excluding Social Security benefits and tax-exempt income, must be less than $3,050 (for 2003). The person you're claiming as a dependent can have MORE income than this if they are either under age 19 or a full-time student and under age 24.
You pass. Even if your great-grandchildren were child movie stars, provided they're under age 19, you can claim them as "dependents."
3. Support Test: You must provide more than 50% of the support for this person.
Based on your description of the situation, you pass this test, as well. But if both you and your wife claim the children as dependents and their mother does, too, you could all get audited by the IRS. Not to worry. Just be prepared to demonstrate the amount of support you provide for your great-grandchildren. So keep receipts for grocery bills, new sneakers, doctor visits, piano lessons — in short, any expenses you pay on their behalf. Neighbors ought to be able to vouch for the days and nights they spend at your home. According to Battaglia your case would be further strengthened if school records listed your address as the address of record for the children.
The child tax credit rose to a maximum of $1,000 per child last year, so claiming your two grand-kids as dependents could save you as much as $2,000 on your 2003 taxes.
Hope this helps!
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