A:

Each qualified dependent that you claim on your federal income tax form can reduce your taxable income by $3,950, as of 2014. In addition to providing a means of reducing your total taxable income by thousands of dollars, having qualified dependents may also allow you to claim significant tax credits, including the earned income credit (EITC) and child tax credit.

The EITC and child tax credits combined can reduce your tax liability by more than $10,000 if you have three dependent children. The child tax credit is $1,000 per qualifying child, and the EITC as of 2013 ranges from $3,250 for one qualifying child, up to a maximum of $6,044 for three or more children. The EITC is adjusted annually for inflation. It is income-based and only available to working individuals or families with annual incomes of less than $51,567.

To get an idea of how much dependent children can reduce tax liability, consider a married couple filing jointly, with a total annual income of $50,000, who have two qualifying children. Claiming the two children as dependents reduces their taxable income to $42,100. The EITC then provides a tax credit of $5,372, and the child tax credit provides an additional $2,000 credit.

Qualified Dependents

A qualified dependent for tax purposes can be either a qualifying child or another qualifying relative. A qualified dependent must either be a citizen or resident of the United States, or a resident of Canada or Mexico. In addition, you cannot claim someone as a dependent if he files his own tax form on which he takes a personal exemption for himself or on which he claims dependents. Anyone who is married and filing a joint return may not be claimed as a dependent.

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