Better tax breaks for families with children this year

Posted: Wednesday, January 16, 2002

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

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 to figure this out.

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.

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.

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