Benefit

You may claim a tax credit of up to $2,000 for each qualifying child under the age of 17. You may claim a $500 credit for a qualifying dependent (a person who is not a qualifying child). If the credit for a qualifying child that you are entitled to claim is more than your tax liability, you may be entitled to a refund under certain conditions.

Generally, the credit up to $1,500 per qualifying child is refundable. This refundable credit usually is allowed to the extent of 15% of earned income over $2,500.

If you have 3 or more children for whom you are claiming the credit, you are entitled to an additional child tax credit. In reality, the additional child tax credit is merely a larger refund of the credit you are ordinarily entitled to. There are 2 ways to figure your refundable amount (the additional child tax credit) and you can opt for the method that results in the larger refund:

1. 15% of earned income over $2,500
2. Excess of your Social Security and Medicare taxes (plus the so‐called employer share of self‐employment taxes, if any) over your earned income credit for the year (the earned income credit is explained in the next main section)

Conditions

To claim the child tax credit, you must meet 2 conditions:

1. You must have a qualifying child or a qualifying dependent.
2. Your income must be below a set amount.

Planning Tips

The child tax credit and the credit for other dependents should be factored into income tax withholding from paychecks to enjoy the tax savings throughout the year. If you know you will become entitled to claim the credit (e.g., you expect the birth of a child), you may wish to adjust your withholding so that you don't have too much income tax withheld from your paycheck. Increase your withholding so that less income tax is withheld from your pay by filing a new Form W‐4, Employee's Withholding Certificate, with your employer. There is a Tax Withholding Estimator at https://www.irs.gov/individuals/tax-withholding-estimator to help you complete Form W‐4.

If you can't claim a credit for a qualifying child because the child doesn't have a valid Social Security number, you may be able to claim the credit for a qualifying dependent. For example, if there is another taxpayer identification number (e.g., Adoption Taxpayer Identification Number, or ATIN), you may be eligible for the $500 credit.

Pitfalls

If you claim the foreign earned income exclusion to exclude income earned abroad up to the annual dollar limit ($112,000 in 2022), you cannot receive the refundable child tax credit.

For 2022 returns filed in 2023, the IRS is not permitted to issue tax refunds for the refundable child tax credit before mid‐February 2023. As a result, refunds usually aren't received until the third or fourth week in February, even for returns submitted in January 2023.

Where to Claim the Credit

On page 1 of Form 1040 or 1040‐SR, enter dependents for whom you are claiming a child tax credit or credit for other dependents, along with their Social Security numbers and relationship to you. The additional child tax credit is figured on Schedule 8812 of Form 1040 or 1040‐SR. The nonrefundable child tax credit or the credit for other dependents is entered on line 19 of the return. The additional child tax credit is entered on line 28 of the return.

Benefit

If you are a working taxpayer with low or moderate income, you may qualify for a special tax credit of up to $6,935 in 2022. The amount of the credit depends on several factors, including your adjusted gross income, earned income, and the number of qualifying children. Table 1.2 shows the maximum credit you may claim based on the number of your qualifying children, if any.

The credit is “refundable” because it can be received in excess of the tax owed.

Conditions

To be eligible for the credit, you must have earned income from being an employee or a self‐employed individual. The amount of the credit you are entitled to claim depends on several factors.

Planning Tips

The credit is based on a set percentage of earned income. However, you don't have to compute the credit. You merely look at an IRS Earned Income Credit Table, which accompanies the instructions for your return.

You can have the IRS figure your credit for you (you don't even have to look it up in the table). To do this, just complete your return up to the earned income credit line and put “EIC” on the dotted line next to it. If you have a qualifying child, complete and attach Schedule EIC to the return. Also attach Form 8862, Information to Claim Earned Income Credit after Disallowance, if you are required to do so as explained next.

If your child does not qualify as your dependent because of the tie‐breaker rule (discussed earlier in this chapter), you may claim the earned income credit with no qualifying child. For example, a grandmother has a home in which her daughter and the baby (granddaughter) live. Under the tie‐breaker rule, while the baby could be a qualifying child of the grandmother and mother, she is the daughter's qualifying child. The grandmother can claim the earned income tax credit with no qualifying child, assuming all other requirements for the credit are met. Alternatively, if the daughter foregoes the dependency exemption, the grandmother can claim it and the earned income tax credit, assuming that her AGI exceeds the daughter's AGI. In this instance, the daughter could claim the earned income tax credit with no qualifying child, assuming all other requirements for the credit are met.

Pitfalls

You lose eligibility for the credit if you have unearned income over $10,300 in 2022 from dividends, interest (both taxable and tax free), net rent or royalty income, net capital gains, or net passive income that is not self‐employment income.

You lose out on the opportunity to claim the credit in future years if you negligently or fraudulently claim it on your return. (If you use a paid preparer, he or she is required to perform to diligence before allowing you to claim the earned income credit.) You are banned for 2 years from claiming the earned income credit if your claim was reckless or in disregard of the tax rules. You lose out for 10 years if your claim was fraudulent. If you become ineligible because of negligence or fraud, the IRS issues a deficiency notice. You may counter the IRS's charge by filing Form 8862, Information to Claim Earned Income Credit after Disallowance, to show you are eligible.

If the IRS accepts your position and recertifies eligibility, you don't have to file this form again (unless you again become ineligible). For 2022 returns filed in 2023, the IRS is not permitted to issue tax refunds for the refundable earned income tax credit before February 15, 2023. As a result, refunds usually aren't received until the third or fourth week in February, even for returns filed in January 2023.

Where to Claim the Earned Income Credit

You can claim the earned income credit on line 27 of Form 1040 or 1040‐SR.

Benefit

If you hire someone to care for your children or other dependents to enable you to work or you incur other dependent care expenses, you may be eligible for a tax credit of up to $2,100. More specifically, this credit is a percentage of eligible dependent care expenses (explained later). The credit percentage ranges from a low of 20% to a high of 35%. The maximum amount of expenses that can be taken into account in figuring the credit is $3,000 for one qualifying dependent and $6,000 for 2 or more qualifying dependents. If your employer pays for your dependent care expenses, you may be able to exclude this benefit from income up to $5,000.

Conditions for the Tax Credit

There are a number of conditions for claiming the dependent care credit; you must satisfy all 6 of them to claim the credit:

1. Incur the expenses to earn income.
2. Pay expenses on behalf of a qualifying dependent.
3. Pay over half the household expenses.
4. File a joint return if you are married.
5. Have qualifying expenses in excess of employer reimbursements.
6. Report information about the child care provider.

Conditions for the Exclusion

Benefits must be provided by your employer under a written plan that does not discriminate in favor of owners or highly compensated employees (for example, top executives cannot obtain greater benefits than you). The dollar limit on this benefit is $5,000 (or $2,500 if you are married and file separately).

The same limits apply to a flexible spending arrangement (FSA), which is an employer plan to which you contribute a portion of your pay to be used for dependent care expenses. This salary reduction amount is not currently taxable to you; it becomes tax‐free income that you withdraw from the FSA to cover eligible expenses.

Planning Tips

If you have the option of making salary reduction contributions to your company's flexible spending arrangement (FSA) for dependent care expenses, decide carefully on how much to contribute each month. You can use the funds in the FSA only for dependent care expenses; you cannot, for example, use any of the funds for your medical expenses or other costs. Any funds not used up by the end of the year (or within the first two and a half months of the next year if your employer has a grace period) are forfeited; they do not carry over. The IRS has not ruled clearly about whether virtual daycare expenses qualify for the credit. However, if it can be shown that the cost was incurred to enable a parent to work, then it seems the expenses could be taken into account.

Pitfalls

If in the same month you and your spouse both did not work and were either full‐time students or not physically or mentally capable of caring for yourselves, only one of you can be treated as having earned income ($250 or $500 as explained earlier in this chapter) in that month.

If you qualify to receive an exclusion, you must reduce the amount of eligible expenses used in figuring the credit by the amount of the exclusion.

If you participate in a dependent care FSA, distributions from the plan are treated as employer reimbursements. Like excludable benefits, distributions from FSAs reduce the amount of expenses you can use to figure the credit.

Check with the administrator of the dependent care FSA you participate in to learn about possible carryovers or using up contributions after the year is over.

If you pay someone to care for your dependent in your home, you are the worker's employer. You are responsible for employment taxes. For more information about these employment taxes, see IRS Publication 926, Household Employer's Tax Guide, at www.irs.gov.

Where to Claim the Tax Credit or Exclusion

You figure the credit and the exclusion on Form 2441, Dependent Care Expenses. The amount of the credit is entered on Schedule 3 of Form 1040 or 1040‐SR.

If you owe employment taxes for a dependent care worker, you must file Form 1040 or 1040‐SR and complete Schedule H, Household Employment Taxes, which is attached to the return. You include employment taxes you owe on Schedule 2 of Form 1040 or 1040‐SR.

Benefits

If you adopt a child, you may be eligible to claim a tax credit for the expenses you incur. The maximum credit is $14,890 per child in 2022. The credit is 100% of eligible adoption expenses up to this dollar limit. If you adopt a child that the state has determined as having special needs (e.g., a medical condition), the credit is $14,890 without regard to your actual adoption expenses. The credit, including one for a special needs child, is subject to income limits.

If your employer pays or reimburses you for adoption expenses, you may exclude this benefit from your income; it is tax free to you if you meet eligibility conditions. The exclusion has the same dollar limit and income limits as the credit.

If a tax‐exempt organization makes a payment to help pay adoption costs, the payment is not taxable. The payment is viewed as a gift to the recipient.

If you take withdrawals from your 401(k) plan to pay for adoption expenses, you are not subject to the 10% early distribution penalty even though you're under age 59½. However, the penalty waiver only applies to distributions up to $5,000 for the adoption of an individual (other than a child of the taxpayer's spouse) who is under age 18 or who has a physical or mental incapacity making the person incapable of self‐support. The distribution is taxable, but can be recontributed to a retirement plan so that you can recoup any taxes paid on the distribution by filing an amended return.

Conditions

To claim the adoption credit or exclusion, 2 key conditions apply:

1. You must pay qualified adoption expenses.
2. Your modified adjusted gross income cannot exceed a set amount.

There is an additional condition for married persons; they must file jointly unless they are legally separated or live apart for the last 6 months of the year. This requirement applies even if only one spouse is adopting a child.

The determination of whether a child is a special needs child must be made by the state; a taxpayer cannot make this call on his or her own.

Planning Tips

The amount of the adoption credit cannot be more than your tax liability for the year. Tax liability for this purpose means your regular tax, plus your tentative alternative minimum tax (without regard to the foreign tax credit), dependent care credit, credit for the elderly or disabled, either education credit, child tax credit, or mortgage interest credit if any.

However, if the credit exceeds your tax liability, you can carry the excess credit forward for up to 5 years beyond the year in which the credit arose.

If your employer has an adoption assistance program but you aren't entitled to some or all of the exclusion (e.g., your MAGI is too high or your expenses exceeded the dollar limit), plan to pay tax on the amount your employer pays or reimburses you. The employer is not required to withhold income tax on these payments. Employer‐paid expenses are reported on your Form W‐2.

There are no income limits for using the penalty waiver for distributions from qualified retirement plans to pay adoption expenses.

Obtain a taxpayer identification number for the child if he/she does not have one. Use Form W‐7A, Application for Taxpayer Identification Number For Pending Adoption, to obtain a temporary tax ID for a child in a domestic adoption who does not have or is unable to obtain his or her own Social Security number.

Pitfall

The year for which you are entitled to claim the credit depends on the type of child you are adopting.

Where to Claim the Adoption Credit, Exclusion, or Penalty Waiver

You figure the adoption credit on Form 8839, Qualified Adoption Expenses, which is attached to your return. The amount of the credit is entered on Schedule 3 of Form 1040 or 1040‐SR.

To claim the credit, you must retain certain documents; they do not have to be attached to the return.

• For U.S. adoptions, attach a copy of the adoption order or decree.
• For adoptions finalized abroad, include the child's Hague Adoption Certificate, an IH‐3 visa, or a foreign adoption decree translated into English. If the child's country of origin is not a party to the Hague Convention, then attach a copy of the translated decree or an IR‐2 or IR‐3 visa.

  When You Pay Expenses	When You Claim Credit
  Any year before year the adoption becomes final (or falls through)	Year after year of payment
  Year adoption becomes final (or falls through)	Year adoption becomes final
  	(or falls through)
  Any year after year adoption becomes final (or falls through)	Year of payment

  When You Pay Expenses	When You Claim Credit
  Any year before year adoption becomes final	Year adoption becomes final
  Year adoption becomes final	Year adoption becomes final
  Any year after year adoption becomes final	Year of payment

• If you adopt a special needs child, also attach the state determination of the child's special needs status certificate so you can claim the full $14,890, regardless of the adoption costs you paid.

If your employer paid or reimbursed you for qualified expenses, you must also complete this form to figure excludable benefits.

Distributions from qualified retirement plans for adoption expenses are reported to you on Form 1099‐R and entered on line 5a of Form 1040 or 1040‐SR; if the total distribution is for adoption expenses up to the dollar limit, enter zero on line 5b. You must also file Form 5329 to claim the penalty exception.

Benefit

Exclusion for foster care payments. If you receive foster care payments to care for a child placed with you by a state or local agency or a tax‐exempt foster care placement agency, you are not taxed on those payments. They are fully excludable; there is no dollar limit.

Qualified payments include payments for the provision of foster care. They also include difficulty‐of‐care payments to account for the additional care required for a child with physical, mental, or emotional handicaps. Payments under a state Medicaid Home and Community‐Based Services Waiver (Medicaid waiver) program are treated as difficulty‐of‐care payments.

However, the exclusion for foster care payments is limited to payments received for 5 qualifying individuals who are over age 18. The exclusion for difficulty‐of‐care payments is limited to payments received for 10 qualifying individuals who are over age 18. There are no limits on the number of children age 18 or under for whom the exclusion may be claimed.

Deduction for out‐of‐pocket costs. See Chapter 6.

Condition

Foster care payments include only those made by a state or local government or qualified foster care placement agency for the care of a qualified foster child or a difficulty‐of‐care payment. Also, you and the foster child must live in the same home.

Planning Tip

If you are a foster care parent dealing with a private agency, make sure the placement entitles you to exclude payments received for the care of the child.

Pitfalls

Payments received from private agencies that are not tax‐exempt entities, even though licensed by the state, are not excludable from income.

Payments made to a child's biological parent cannot be excluded, even if labeled “foster care payment” because such parent is never a foster parent.

Where to Claim the Exclusion

Foster care payments are not reported on the return if they are excludable. If you care for more than the allowable number of children over age 18, you must include the payments in income. Report this as “other income” on your return.

Benefit

Child support payments are not taxable to the child, nor to the parent who receives them on behalf of the child. There is no dollar limit to this benefit. It does not matter whether child support payments are made pursuant to a divorce decree or separation agreement made before 2019 or after 2018 (when the rules for alimony payments were changed).

Conditions

Payments for child support should be fixed. If they are set by a decree of divorce or separate maintenance or a separation agreement, they are considered to be fixed.

In addition, if payments made to a parent will be reduced or terminated upon a contingency related to the child, then those payments are treated as being fixed for child support. Contingencies for this purpose include:

• Reaching the age of majority (generally age 18 or 21, depending on the law in your state)
• Leaving school
• Marrying
• Entering military service
• Moving out of the custodial parent's home
• Starting to work and/or attaining a set income level

Planning Tip

If a parent is required to pay both alimony and child support under a pre‐2019 divorce decree and makes a single payment that is less than the total amount due, the first dollars are considered tax‐free child support. This is relevant if the alimony is pursuant to a divorce decree or separation agreement executed before 2019 under which alimony payments are deductible.

Pitfalls

The parent who makes child support payments cannot deduct them. They are not considered to be part of deductible alimony payments where applicable (explained in the next section).

If a reduction in child support payments to a parent is not specifically tied to the child's age of majority but is scheduled to occur within 6 months before or after such date, the reduction is treated as if it was tied to the child. This means that the amount subject to reduction is viewed as child support and not as deductible alimony if a pre‐2019 divorce decree or separation agreement is involved. The same rule applies if you are making payments on behalf of more than one child and there are at least 2 reductions, each of which is within a year of a child's reaching the age of majority.

If you are due a refund of federal income tax because you overpaid it through withholding or estimated taxes, you won't receive it if you are delinquent on your child support payments. The IRS is authorized to divert your refund to the parent owed the child support payments as long as the state provides notice to you and a procedure you can follow to contest this action.

Where to Claim the Exclusion

Child support payments received are not reported on the return.

Benefit

If you have a divorce or separation agreement executed before 2019, and you make payments to a spouse or former spouse for alimony, support, or spousal maintenance, you can deduct the payments if certain conditions are met. There is no dollar limit on this deduction. The deduction is claimed as an adjustment to gross income; you do not have to itemize your other deductions to write off alimony payments you make. But if you make payments pursuant to a divorce or separation agreement executed after December 31, 2018, you cannot deduct your payments.

Conditions

There are 4 conditions that must be met for payments made under a pre‐2019 divorce decree or separation agreement to a spouse or former spouse to be considered alimony:

1. Amounts must be paid pursuant to a legal requirement, such as a court decree.
2. Payments must be made in cash.
3. You must live apart from your spouse or former spouse.
4. Your responsibility to make payments must terminate on the death of your spouse or former spouse.

Typically, alimony that is deductible by the payer is taxable to the recipient—the government effectively nets no additional tax revenue from the arrangement. But this symmetry is not required. If you meet all of the conditions, you can deduct your alimony payments even if your former spouse is not required to pay tax on them (for example, your former spouse lives abroad where alimony is exempt income).

Planning Tips

If you have a pre‐2019 divorce decree or separation agreement, don't make voluntary payments if you want to deduct them. For example, don't make payments prior to a court order or separation agreement and don't voluntarily increase your payments. If you want to ensure that increased payments qualify as deductible alimony, you need to amend the court order or separation agreement to incorporate the change. If a pre‐2019 divorce decree or separation agreement is changed or amended, the old alimony rules continue to apply unless the revised document specifically says that the new rules (i.e., that payments are not deductible by the spouse who pays or taxable to the spouse who receives) should apply. The Tax Court made it clear that paying health insurance premiums for an ex‐spouse through a cafeteria plan may qualify as deductible alimony, even though the payments are made on a pre‐tax basis (a double tax benefit for the paying spouse).

Pitfalls

Payments made to someone who was never legally your spouse cannot be treated as alimony. For example, if you make payments to a domestic partner, you cannot deduct them even though they otherwise have all the earmarks of alimony.

Property settlements are not deductible.

Where to Claim the Deduction

The amount of deductible alimony payments is entered on Schedule 1 of Form 1040 or 1040‐SR. There is no separate form or schedule to complete when deducting alimony. However, you must include the recipient's Social Security number on your return (to allow the IRS to cross‐check whether the recipient reported the alimony as income) and the date of the divorce or separation agreement (to allow the IRS to see whether alimony is deductible).