Tax Tips
Did you know that the IRS will give you money back just for having a child living in your home? Three tax credit programs give extra money to people who are raising children. That includes grandparents and great grandparents. If you qualify, you may be able to pay less to Uncle Sam each year.
Keep in mind that a tax credit is better than a tax deduction. So don't miss the chance to claim these credits. What's so great about a credit? Plenty! You get to subtract a tax credit from any federal income tax that you owe. A deduction only reduces the income that you use to figure out the taxes you owe. Simply put, a credit keeps more money in your pocket.
Earned Income Tax Credit
The Earned Income Tax Credit—or EITC—is for low-income people and families. You don't have to be raising a child to receive this tax credit. But people who are raising children get a bigger tax break. Is your tax credit greater than the tax you owe to the government? Good news! You will get a refund from the IRS.
NOTE: To get the EITC, you must work during the tax year. You must also file a federal tax return. Plus, you can only earn so much money. For the 2003 tax year, these were the income rules: See IRS publication 596 for specific EITC program calculations.
| If you are … | And have … | You can't earn more than … |
|---|---|---|
| Single | No children | $11,230 |
| Single | 1 child | $29,666 |
| Single | More than 1 child | $33,692 |
| Married and filing jointly | No children | $12,230 |
| Married and filing jointly | 1 child | $30,666 |
| Married and filing jointly | More than 1 child | $34,692 |
There are age limits for the children you claim when you take your tax credit. Are your grandchildren full-time students? Then you can claim them until they turn 24. Otherwise, you can only claim them until they turn 19. Children of any age can qualify if they have a disability.
Do you have at least one child at home? Then you can receive advance payments of the EITC in your weekly paycheck. To receive your credit in advance, you must fill out a W-5 form at work.
Child Tax Credit
Does your family earn too much money to receive the Earned Income Tax Credit? You may still be able to get the Child Tax Credit. You take this credit right off your tax bill. But you won't get money back if you don't owe any taxes. The child for whom you take the credit must be under age 17. You must claim that child as a dependent on your federal income tax return.
Until the year 2005, you will be able to take a $1,000 tax credit for each child who qualifies. From 2005 until 2008, the tax credit will be reduced. During those years, you will only be able to claim a credit of $700 per child.
Are you raising three or more children? You may be able to get the "Additional Child Tax Credit." This will give you a larger tax benefit.
Child and Dependent Care Credit
The Child and Dependent Care Credit helps families pay for childcare so they can work or look for work. This tax credit does not give you a tax refund if your credit is greater than the taxes you owe. The amount of your credit will depend on the number of children you are raising. It will also depend on your income and the amount you pay for child care. Your grandchild must be under the age of 13 or have a disability.
State Tax Credits
You may be able to claim some credits on your state tax return. Seventeen states now offer their own earned income tax credit. You can take the child and dependent care credit off your taxes in 27 states. Check the chart below to see if your state has a program. Then call your state department of revenue to find out how to apply.
| State | Offers an Earned Income Tax Credit for State Taxes | Offers a Child and Dependent Care Credit for StateTaxes |
|---|---|---|
| Arkansas | X | |
| California | X | |
| Colorado | X | X |
| Delaware | X | |
| District of Columbia | X | X |
| Hawaii | X | |
| Idaho | X | |
| Illinois | X | |
| Indiana | X | |
| Iowa | X | X |
| Kansas | X | X |
| Kentucky | X | |
| Louisiana | X | |
| Maine | X | X |
| Maryland | X | X |
| Massachusetts | X | X |
| Minnesota | X | X |
| Montana | X | |
| Nebraska | X | |
| New Jersey | X | |
| New Mexico | X | X |
| New York | X | X |
| North Carolina | X | |
| Ohio | X | |
| Oklahoma | X | X |
| Oregon | X | X |
| Rhode Island | X | X |
| South Carolina | X | |
| Vermont | X | X |
| Virginia | X | |
| Wisconsin | X |
This article is meant to provide general financial information; it is not meant to substitute for, or to supersede, professional or legal advice.
AARP Resources
AARP Tax-Aide
AARP offers free help with tax preparation through its AARP Tax-Aide Program. The program has nearly 32,000 volunteers, who assist 1.85 million persons at sites throughout the United States.
Get Answers to Your Tax Questions Year Round
Do you have a federal tax question you'd like answered? AARP Tax-Aide has a free online counseling service with trained and IRS-certified volunteers waiting to help you. Browse though a list of previously asked questions or ask a new question.
Benefits QuickLINK
AARP Foundation’s online tool, Benefits QuickLINK, helps Grandfamilies find out if they or the children they are raising are eligible for any of the 15 most important public benefits for older Americans and families with children.
Your Money: 15 Tax-Return Factors Not to Overlook
This article from the AARP Bulletin explains 15 tax deductions and sources of income that need to be on your tax return.
Other Resources
Internal Revenue Service
The IRS provides a wealth of information about all the federal tax credits. From the IRS home page, use the "Search" window to find information on a particular tax credit program.
State Earned Income Tax Credits
The National Center of Children in Poverty provides a state-by-state explanation of the rules for earned income tax credits.
State Child and Dependent Care Tax Credits
The National Center of Children in Poverty provides a state-by-state explanation of the rules for child and dependent care tax credits.
Books
Find these books online at Barnes & Noble.com
"Ernst and Young Tax Saver's Guide 2004," Peter W. Bernstein (Editor), Wiley, John & Sons, Incorporated, October 2003
"J. K. Lasser's 1,001 Deductions and Taxbreaks: Your Complete Guide to Everything Deductible," Barbara Weltman, Wiley, John & Sons, Incorporated, October 2003
"How to Pay Zero Taxes 2004," Jeff A. Schnepper, The McGraw-Hill Companies, December 2003
