Child-Related Provisions
Child Tax Credit. Before the new law, eligible taxpayers could claim a $500 tax credit (that is, a direct offset against income tax) for each qualifying dependent child under age 17. Taxpayers whose tax liabilities were not high enough to take full advantage of the credit generally could not receive refunds of any unused credit amounts, with the exception of eligible families with three or more qualifying children. Moreover, prior law prohibited use of the child tax credit to reduce alternative minimum tax liability after 2001.

Under the new law, the child tax credit is increased to $1,000, phased in over 10 years, starting in 2001.

The new law also makes the child tax credit refundable to the extent of 10% of the taxpayer’s earned income in excess of $10,000 (as indexed for inflation after 2001) for tax years 2001 through 2004 (15% after 2004). Families with three or more children may continue to use the old rules for a refundable child tax credit if that amount is greater than the new credit-refund amount. And the new law allows the child tax credit to be claimed permanently against the alternative minimum tax for tax years starting after 2001.

Adoption Tax Benefits. Currently, taxpayers may claim a tax credit for qualified adoption expenses of up to $5,000 a child ($6,000 in the case of a special needs child). The credit is phased out ratably for taxpayers with $75,000 to $115,000 of AGI. The credit for non-special needs adoptions was set to expire after 2001. The law also allows, through 2001, an exclusion from income for employer-provided adoption assistance (the dollar limits and phaseout are the same as for the credit).

Effective for years starting after 2001, the credit is permanent for all adoptions, the maximum credit increases to $10,000 per child for all adoptions, and the phaseout starting point becomes $150,000 of AGI. The law permanently extends the income exclusion for employer-provided adoption assistance and raises the maximum exclusion amount and phaseout range to match the credit. After 2002, a credit/exclusion can be claimed for a special needs adoption regardless of whether the taxpayer actually has qualified adoption expenses.

Dependent Care Credit. Current law allows a taxpayer to claim a dependent care credit for a portion of qualifying child or dependent care expenses paid for the purpose of allowing the taxpayer to work. Generally, to be eligible, the taxpayer must maintain a home for a dependent under age 13, or a spouse or other dependent incapable of self care. The maximum annual credit is 30% of up to $2,400 of expenses for one qualifying individual and $4,800 for two or more. The credit percentage is reduced in steps to 20% as AGI increases from $10,000 to over $28,000.

Effective for years starting after 2002, the 30% credit percentage increases to 35% and the maximum amount of eligible expenses rises to $3,000 for one qualifying individual and $6,000 for two or more. Plus, the credit percentage “phase-down” to 20% will occur when AGI increases from $15,000 to over $43,000.

In a related provision, beginning in tax years starting after 2001, employers may claim a tax credit equal to 25% of qualified expenses for employer-provided child care and 10% of qualified expenses for employer-provided child care resource and referral services, up to a maximum $150,000 credit per tax year.

CWEB-L-114

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