Does the Alaska PFD effect the Child Tax Credit?

[FSairsonlock]

This is my family's first year claiming the PFD Credit since living in Alaska. We all claimed it and received it. Myself, my wife, and our child who is under 19. I know that we all should receive 1099-DIVs or 1099-MISCs for this. The amount per person was $3284. My question is if I claim our child's 1099 on our joint tax return how will it affect our normal tax return or or the credits that are normally applied. I know that the amount of $3284 surpasses the limit for unearned income for our child for which we would not have to claim it. I've been reading around on here for similar posts, and I may have already read the answer but I wanted to clarify my question to hopefully get a more concrete answer. I'm fairly certain that we normally get the EITC and a Dependent/Child Tax credit when we file. Naturally if we file a separate return for our child then I we cannot claim the dependent credit, however if we just file their 1099 on our taxes will it still have a similar effect. With the economy the way that it is, I wanna make sure that our taxes are done correctly, but also that my family gets back what we are owed, and are taken care of. Hopefully I didn't muddle up the question with extra context. Thanks!

[rjs]

The Alaska PFD is not a credit, it's income.

You will receive a Form 1099-MISC for the PFD in January. It's not really a dividend, even though they call it that.

You can claim the child as a dependent even if you file a separate tax return for the child. You just have to make sure that on the child's tax return you check the box that indicates that the child can be claimed as a dependent.

The only advantage of reporting the child's income on your tax return is that it's a little less paperwork, but there are potentially significant disadvantages that can result in higher tax for both you and the child. Part of the child's income gets included in your Adjusted Gross Income (AGI). The higher AGI could reduce or eliminate certain deductions or credits that are limited or phased out based on AGI, including the Child Tax Credit and the Earned Income Credit (EIC). IRS Publication 929 has a long list of reasons that reporting the child's income on the parents' return could result in paying more tax. See "Effect of Making the Election" on page 11.

So you are probably better off, and certainly no worse off, filing a separate tax return for the child.

[Opus 17]

Your headline asks about the child tax credit.

Other income such as the PFD does not change your ability to claim your child as a dependent, as long as the child's income is not so high that they pay more than half their own living expenses.  (And even if a child makes so much money that they could pay more than half their expenses (a child TV actor, for example) it still doesn't count as support unless they actually use it for living expenses; if they save or invest the money, it's not support and they are still their parent's dependent.)  The $2000 child tax credit is just based on having a child dependent under age 17.   If you were to file MFS, one parent could claim the child and get the $2000 child tax credit.  

Your main question also asks about EITC

You are ineligible for EITC if you have more than $10,300 of investment income.  This is substantially increased from the past.  If you file MFJ to claim EITC, your $6600 PFD income will not disqualify you from getting EIC, as long as you have less than $3400 of other investment income.

If you report the child's PFD on your tax return, you would have $9900 of investment income, which is still less than the $10,300 threshold, so I think you are fine.  (I don't actually know if the child's income counts against you for EIC in that situation, but even if it did, you are under the newly increased limit.).  There's no harm in reporting the child's PFD on their own return, though. 

[rjs]

The Alaska PFD is not counted as investment income for qualifying for the EIC.

[Opus 17]

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@rjs wrote:

The Alaska PFD is not counted as investment income for qualifying for the EIC.

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Did the EIC change definitions from "unearned income" to "investment income"?  Limiting it to investment income would also remove the disqualification for having unemployment compensation or hobby income.  I couldn't find a description, although I did see the Rescue Plan Act changed the threshold from $3000 to $10,000.  

[rjs]

The limit on investment income for EIC was first instituted in 1996. It has always said "investment income."

Worksheet 1 in Pub. 596 shows what's included in investment income for the EIC limitation. It does not include Alaska PFD (Schedule 1 line 8f), unemployment (Schedule 1 line 7), or hobby income (Schedule 1 line 8i).

There is a Worksheet 2 for calculating how much of the child's income is included in investment income if Form 8814 is used and the child received the Alaska PFD. I haven't attempted to figure out exactly what the worksheet is doing, but if the Alaska PFD is the child's only income, none of it is included in investment income.

Maybe you are thinking of kiddie tax, which does use unearned income.