Katrina Emergency Tax Relief Act of 2005

Calculating child tax credit and earned income credit from 2004 income
Up until the point that Hurricane Katrina struck, Sarah Birch has earned $6,500. She had no other earned income or taxable income for the rest of the year. For tax year 2004, Sarah had earned income of $16,000. Sarah, who has two minor children, may elect to use her 2004 earned income to calculate the earned income tax credit (EITC) and additional child tax credit (ACTC). The calculations are as follows.

*The ACTC is the lesser of 1) the unused credit ($2,000 in this case) or 2) 15 percent of earned income - $11,000.

In this case Sarah is better off electing to use 2004 earned income to calculate the credits. However, there isn't a "one-size-fits-all" solution. If Sarah's 2004 earned income were higher, the additional child tax credit would also be higher, but the earned income tax credit would be lower. It is necessary to calculate the credits both ways to determine the best outcome for you.

Note: The credits cannot be split; meaning, either 2004 or 2005 earned income must be used to calculate both credits. In any case, income tax before credits will be based on 2005 taxable income.

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