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Child Tax CreditChild 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. 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. Educational Credit
The deduction expires in the tax years beginning after 2005. Interest on student loans: Previous to 2001 interest paid on student loans of up-to $2,500 can be deducted per year during the first 60 month in which interest payment are required. Voluntary interest payment do not qualify and the deduction is phased out at AGI between $40,000 - $55,000 for single taxpayers and $60,000 - $75,000 for married taxpayers. The new tax law increased the AGI phase out range to $50,000 - $65,000 for single taxpayers and $100,000 - $1305,000 for married taxpayers. The new law also repeals the 60 month limits and the voluntary payment restriction. Education IRAs: Education IRAs are designed to pay for the post-secondary educational expenses of a designated beneficiary. The higher education expenses include tuition, fees, books, and supplies. The maximum nondeductible contribution made by a taxpayer to education IRAs currently allowed is $500 per year; providing that the the beneficiary is under the age of 18. Educational IRA distributions are excluded from income if the amount of distributions does not exceed the allowable educational expenses; providing that the beneficiary is under the age of 30 (some age exceptions allowed). If distributions exceed allowable expenses the excess is taxable at the taxpayer rate plus 10% penalty. Under the current tax laws this amount is phased out ratably for AGI of $150,000 to $160,000 joint filers, or $90,000 - $110,000 single files. The deduction is totally eliminated for higher incomes. The new law applied several changes to education IRAs effective tax year 2001. The major changes include:
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Deduction for higher education expenses:
This deduction may be claimed whether or not taxpayer itemizes deductions;
however this deduction cannot be claimed if the student claims HOPE or LIFETIME
Credit in the same year. The amount of maximum deduction that can be
claimed is the following: