The ITC adjustment is made up of four possible elements, some or all of which may be present in a particular case:
Income Tax Deduction. A portion of a tax payer’s income taxes can be saved through the ability to claim an additional exemption on the parent’s tax return for each dependent child. The value of the tax savings is equal to the reduction in the parent’s taxable income (the exemption value changes from year to year), multiplied by the parent’s income tax bracket. For example, if the exemption value is $4,050, and the parent’s income tax bracket is 25%, the tax savings is $4,050 x .25 = $1,012.50 per year or $84.38 per month for each child. A similar savings is available in the Kansas income tax. This ability to claim a child as an exemption can be transferred between the parents (or “alternated” from year to year).
Child Tax Credit. The Child Tax Credit permits additional Federal taxes to be saved if a dependent child is under the age of 17 at the end of the tax year. This is a “dollar for dollar” credit against the tax, not merely a reduction in taxable income The amount of the tax credit is $1,000 for each such child. THE CREDIT IS NOT RELATED TO THE PARENT’S INCOME TAX BRACKET. For example, the tax savings is $1,000 or $83.33 per month for each qualifying child REGARDLESS OF THE PARENT’S INCOME OR TAX BRACKET. The Child Tax Credit is, however, subject to a “phase-out” or reduction in the $1,000 credit for certain high income tax payers (beginning at $75,000 if the taxpayer files “Single,” $110,000 if the taxpayer files “Married filing Jointly”
Head of Household. The Federal and state taxes saved through reduced tax rates for a taxpayer who can file as “head of household.” The value of the tax savings is equal to the reduction in the parent’s taxes arising from the parent’s lower income tax bracket. For example, a taxpayer filing “single” with a taxable income of $50,000 pays taxes in the 25% Federal tax bracket; but if filing as “head of household” is in the 15% Federal tax bracket.
The “filing status” also affects the “standard deduction” amount – the reduction in Federal taxable income ($6,300 for the “single” filer; $9,300 for the head of household filer – a gain of $3,000); in Kansas the taxable income reduction is $2,500. Finally, a head of household filer in Kansas receives an additional exemption, which further reduces taxable income.
Note that a taxpayer can file “head of household” without claiming a dependent child. The fling requirement is simply that the taxpayer is unmarried at the end of the tax year, and provided a home for a qualifying person (child, stepchild, foster child, mother, father, sibling or other blood relative) for more than half of the year. Thus, for a divorced couple with two children, both parents can claim HOH status if one of the children spends one day more than half the year with each parent.
Standard Deduction. If, instead of itemizing deductible expenses, a parent elects to take the “Standard Deduction,” a tax savings is generated to the extent that the standard deduction exceeds the total deductible expenses which could have been itemized.