It depends on what your income level is and what benefits you qualify for. If your child is a qualifying child to you, you may claim him/her as a dependent which for 2006 gives you a $3,300 dependent exemption deduction. Also you may claim the $1,000 child tax credit. If you have earned income and it is below certain levels, you may also claim the earned income tax credit.
A qualifying child is an individual who bears the requisite relationship to the taxpayer for the taxable year, who has the same principle place of abode as the taxpayer for more than one-half of such taxable year, who meets the age requirements, and who has not provided over one-half of such individual's own support for the calendar year in which the taxable year of the taxpayer begins.
The relationship test is satisfied if the individual is a child of the taxpayer or a descendant of the taxpayer's child, or a brother, sister, stepbrother, or stepsister of the taxpayer or a descendant of any such relative.
The age requirement is met if the individual in question has not attained age 19 (age 24 if the individual is a student) as of the close of the calendar year in which the taxable year of the taxpayer begins. An individual that is permanently or totally disabled as defined in IRC Sec. 22(e)(3) at any time during the calendar year is treated as meeting the age requirement.
There are special rules in cases where two or more taxpayers claim a qualifying child. If an individual may be claimed as a qualifying child by one or more parents who do not file a joint return together, the child is treated as the qualifying child of the parent with whom the child resided for the longest period of time during the taxable year, or if the child resides with both parents for the same amount of time, the parent with the highest adjusted gross income. If an individual may be claimed as a qualifying child by two or more taxpayers for a taxable year beginning in the same calendar year, the individual is treated as the qualifying child of (1) the taxpayer who is the individual's parent or (2) in the case of no such parent, the individual with the highest adjusted gross income.
Child Tax Credit
Accordingly, if your children are your dependents and they are "qualifying children" under the age of 17 as of 12/31/05, then you may also claim the $1,000 child tax credit. However, this tax credit is not refundable, which means it will only reduce whatever tax liability you have.
Earned Income Credit
Generally to claim the earned income tax credit you must file a U.S. tax return, must be a citizen, you must have earned income, you must have a valid Social Security Number for yourself, your spouse (if filing jointly) and your qualifying child, your investment income is limited to $2,650, your filing status cannot be “married filing separately” and you cannot be a qualifying child/dependent of another person. The maximum credit for 2005 for a qualifying person with two qualifying children was $4,400 ($2,662 with one qualifying child, $399 with no qualifying children).
Earned income and adjusted gross income (AGI) must each be less than:
A qualifying child is one who is (1) your child or stepchild (whether by blood or adoption), foster child, sibling or stepsibling, or a descendant of one of these; (2) has the same principal residence as the taxpayer for more than half the tax year (some exceptions exist for divorces, deaths, etc.); (3) the child must be under the age of 19 at the end of the tax year, or under the age of 24 if a full-time student for at least five months of the year, or be permanently and totally disabled at any time during the year; and (4) the child did not provide more than one-half of his/her own support for the year.
To claim the credit you need to complete and file Schedule EIC with your tax return (see http://www.irs.gov/pub/irs-pdf/f1040sei.pdf). You might also want to visit the following website to get more information about the earned income tax credit. http://www.irs.gov/irs/article/0,,id=134524,00.html.
You may qualify for the "advance earned income credit" which will allow you to collect part of your credit in advance from your employer through an addition in your wages. If you have at least one qualifying child fill out form W-5 and give it to your employer (see http://www.irs.gov/pub/irs-pdf/fw5_04.pdf).