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The IRS has proposed several rule changes that could bode well for taxpayers. The biggest proposed change would affect the earned income tax credit that has been in effect since 1994.The current rule states that if a dependent meets the "qualifying child" test for more than one taxpayer, only one taxpayer can claim the earned income tax credit. This makes the other taxpayer ineligible for the reduced earned income tax credit for childless tax payers. With the proposed changes both taxpayers are eligible to claim the earned income tax credit; one can claim the full portion of the credit and the other can claim the reduced credit for childless taxpayers if certain requirements are met.

The IRS has also proposed updates to the dependency rules in order to align them more with the modifications made by the Working Families Tax Relief Act of 2004 (WFTRA). The most notable of the changes involves the adoption of a child. The regulation proposes that the word "taxpayer" should be replaced with "person", this way any child legally adopted by a person is treated as a child by blood for all relationship tests. This would prevent a situation where only the "taxpayer" that is claiming the dependency exemption for the adopted child is recognized as the person who adopted the child.

The proposed regulations would also affect the head of household status to reflect the changes made by WFTRA. The proposed regulation removes the requirement of "maintaining a household" in order to claim the dependent care credit, opening it up for more taxpayers to be eligible for this credit.

These proposed regulations can be applied to any open tax years, even though they will not be officially in effect until after the final regulations are published in the Federal Register. For more information regarding the proposed dependency regulation changes, please contact your local UHY LLP professional, or visit us on the web.

By Michelle Moore, CPA