Posted on Sunday, January 13, 2002

Federal taxes
Tax breaks for dependents rise

By Curt Anderson
Associated Press

WASHINGTON — Tax breaks for many families with children get more generous this year, including a bigger child tax credit and larger credits for adoption.

The changes were part of the 10-year, $1.35 trillion tax cut enacted last summer by Congress and President Bush. Credits are generally better for taxpayers than deductions because they amount to a dollar-for-dollar reduction in taxes owed.

The credit for each dependent child under age 17 grows from $500 to $600 for 2001 tax returns. The credit will stay at $600 through 2004, grow to $700 in 2005 and $800 in 2009, then jump to $1,000 in 2010.

The new law also made some changes in how much of the credit is “refundable” — that is, how much a taxpayer can receive as a refund even if no income taxes are owed.

For 2001, the credit is refundable to the extent of 10 percent of a taxpayer’s income in excess of $10,000. In the past, the law required a taxpayer to have at least three children for any of this credit to be refundable. There is a worksheet and Form 8812 in IRS tax filing packages.

Income limits can prevent some taxpayers from claiming the credit. The total credit amount is reduced by $50 for each $1,000 of modified adjusted gross income above $110,000 for married couples filing jointly and $75,000 for single filers until it eventually phases out completely.

Adoption tax credit

The new tax law also increases the adoption tax credit, which helps families defray the expenses of adopting a child.

Since 1997, a credit of up to $5,000 has been available for such costs as travel and legal fees associated with an adoption. The credit is $6,000 for adoption of a child with special needs.

Things get even better in 2002. The credit doubles to $10,000 for all adopted children, including those with special needs, and income limits for taxpayers get more generous.

In 2001, the adoption credit begins to phase out when a taxpayer’s adjusted gross income exceeds $75,000 and disappears completely at $115,000. In 2002, the phaseout range rises to $150,000-$190,000.

To qualify for the credit, married taxpayers must file jointly and some information about the child must be included on the tax return.