Each qualified dependent you claim on your federal income tax form can reduce your taxable income by $4,050 for the tax year 2017. In addition to providing a means of reducing your total taxable income by thousands of dollars, having qualified dependent children may also allow you to claim significant tax credits, including the earned income credit (EIC) and child tax credit.
The EIC and child tax credits combined can reduce your tax liability by almost $10,000 if you have three dependent children. The child tax credit is $1,000 per qualifying child, and the EIC as of 2017 ranges from $3,400 for one qualifying child, up to a maximum of $6,444 for three or more children. The EIC is adjusted annually for inflation. It is based on your income, whether you are filing jointly or individually, and how many qualifying children you are claiming. The highest adjusted gross income you can have is $48,340 if you file individually, or $53,930 if you file jointly, with three children.
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 $41,900. The EIC then provides a tax credit of $5,616, and the child tax credit provides an additional $2,000 credit, bringing their taxable income down to $34,284.
A qualified dependent for tax purposes can be either a qualifying child or another qualifying relative (the child tax credit and EIC may not apply to other qualifying relatives). 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. (For related reading, see: How to Claim a Dependent on Your Tax Return.)