A tax break that's worth the hassle

Custody complications

Claiming the earned income credit can be especially confusing for people sorting through child-custody issues.

When custody is split, only the parent who physically housed the child for more than six months can claim the credit. Sometimes, however, a child might be claimed by either parent.

This would be the case if you and your spouse lived together with your daughter until July 1 and then you separated. You shared custody of your daughter equally until your divorce became final in December. Since the girl lived with both of you for more than half the year and neither parent exceeded the credit's earning limits, you must decide who will claim the larger credit amount that is available when a child is involved.

If you and your spouse cannot agree, and you each name your daughter in your tax-credit claim, the IRS will invoke tiebreaker rules to determine which taxpayer gets the tax break.

Tiebreaking guidelines

First, the agency looks at whether only one person is the child's parent. This would be the case, for example, if one credit claimant is a stepparent. The parent would get the credit.

If neither person is the child's parent, the IRS would then give the credit to the filer with the highest eligible adjusted gross income.

Finally, if both filers are parents of the child, the parent with whom the child lived the longest during the tax year would be given the credit. If the child lived with both separated parents for an identical amount of time, the credit would go to the parent with the highest adjusted gross income.

If several children are involved in a family situation where two taxpayers may claim them, the adults can decide to share the credit. For example, you can claim the earned income credit for one child and your spouse can claim it for the other children. Again, if a sharing agreement cannot be reached, the tiebreaker rules would come into play.

Filing specifics

The earned income credit can be claimed on any individual tax return -- the 1040EZ, 1040A or 1040. Each form's instruction booklet devotes several pages and worksheets to the credit.

In addition to the online assistance program, you also can find information and filing examples in IRS Publication 596, Earned Income Credit (.pdf file). Taxpayers with specific questions about the credit can call the IRS at 1-800-829-1040.

Military personnel also need to pay attention to special provisions that could require them to compute the credit two ways. Normally, combat pay is not taxable, but servicemen and servicewomen who received this income now can choose to count it if it will help in claiming the earned income tax credit.

As the paperwork devoted to the earned income credit demonstrates, filing for it can be daunting. But don't be discouraged by the rules. Just make sure you follow them.

If you qualify, the earned income tax credit can give you back a nice chunk of change.

This article was reported and written by Kay Bell for Bankrate.com.

Updated Jan. 2, 2009

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