Tax Credits for People Who Work

By Brenda Procter, University of Missouri-Columbia

	There is some good news for working families.  Recent tax code changes can bring many of them added financial relief.  Low- and moderate-income families may qualify for one or more of three different Federal tax credits:  the Child Tax Credit, the Earned Income Credit, and the Child and Dependent Care Credit. The rules differ for each of them, but this year's changes mean that many families may qualify for all three tax credits.

- What is the Child Tax Credit?

	The Child Tax Credit is a federal tax credit worth up to $600 per child in tax year 2002. Families must have dependent children under age 17 to get it. Millions of families are newly eligible even if they owe no taxes. The Child Tax Credit comes as a refund from the IRS.

- What is the Earned Income Credit?

	The Earned Income Credit is a special tax benefit for low- to moderate-income workers. It reduces their tax burden, supplements wages, and makes work more attractive than public assistance. The credit can mean up to $2506 for workers raising one child in their home, or up to $4140 for workers raising more than one child. Even workers without children can qualify for up to $376. Although children must meet residency requirements, a child does not have to be claimed as a dependent to qualify a worker for the Earned Income Credit.

- What is the Child and Dependent Care Credit?

	The Child and Dependent Care Credit is a tax benefit that helps families pay for childcare that they need to work or look for work. It also helps workers pay for the care of a spouse or adult dependent who is incapable of self-care. It can offset taxes taken out as payroll withholding and cover what is still owed at the end of the year, depending on the size of the credit. In most cases, the credit can only be claimed for a child who is claimed as a dependent, but there are special rules for children of divorced or separated parents.

	The Child and Dependent Care Credit differs from both the Earned Income Tax and the Child Tax Credit in that families earning too little to pay Federal income tax cannot take the Child and Dependent Care Credit. The Child and Dependent Care Credit is between 20 and 30 percent of expenses up to $2400 for one child or dependent, or up to $4800 for more than one child or dependent. It can mean a credit up to $720 for families with one child or dependent in care, or up to $1440 for families with more than one in care.