Dear Clients and Friends:

The child tax credit allows you to claim a credit of $600 for each qualifying child. For example, a taxpayer with four qualifying children will be entitled to a credit of $2,400. A qualifying child is an individual under the age of 17 for whom you can claim a dependency exemption and deduction and who is your child or other direct descendent, or a stepchild or eligible foster child. Although you must be entitled to a dependency deduction for the child, that deduction ($3,050 for 2003) isn't reduced or otherwise modified because of the child tax credit.

The credit is phased-out for certain higher income taxpayers. Specifically, the amount of the credit allowable is reduced by $50 for each $1,000 (or part of $1,000) of modified adjusted gross income (generally, the dollar amount shown on the last line of page one of your individual income tax return, but with certain adjustments) above a threshold amount, i.e., $110,000 on a joint return, $75,000 for single filers and heads of household, and $55,000 for married individuals who file separate returns. This means, for example, that a married couple filing jointly who have one qualifying child are entitled to a credit of $550 if their modified adjusted gross income is more than $110,000 but not more than $111,000. They lose the credit completely if their modified adjusted gross income is more than $121,000.

If the otherwise allowable child tax credit is more than the amount of income tax you owe, the excess is refundable to the extent of the greater of:

• 10% of earned income above $10,500 (for 2003), or

• For taxpayers with three or more qualifying children, the excess of the taxpayer's social security taxes for the year over the taxpayer's earned income credit for the year.

Taxpayers with earned income of $10,500 or less (for 2003) will not qualify for any refundable child tax credit under the 10%/$10,500 rule above, although they may qualify under the "excess of social security taxes over earned income credit" rule. Credits that cannot be used to offset income tax owed (because the credits exceed the amount of tax) and that aren't refundable are lost.

To the extent that the child tax credit will reduce your 2003 income tax liability, you may want to consider a corresponding reduction in your wage withholding in 2003. You can do this by filing a new Form W-4, Employee's Withholding Allowance Certificate, with your employer.

Also, bear in mind that if you qualify for the child tax credits you may also qualify for the earned income credit. You can claim both credits if you meet the requirements for both.

Please call 3115-363-3338 if you have any questions or would like to discuss this issue further.

Sincerely,

G. William Hatfield
Certified Public Accountant
Certified Financial Planner