What is the child tax credit?
The child tax credit is one of the most important tax credits that allows parents to claim a credit of $1,000 for each qualifying child they have Thus, for example, a taxpayer with three qualifying children will be entitled to a credit of $3,000. Enacted in 1997 and expanded with bipartisan support since 2001, the Child Tax Credit (CTC) helps working families offset the cost of raising children. The CTC includes a refundable component, the Additional Child Tax Credit.
Using the Child Tax Credit
This means that if the value of the CTC exceeds the amount of federal income tax a family owes, the family may receive part or all of the difference in the form of a refund check. As a result, many working families can still benefit from the credit even if their incomes are so low that they owe little or no federal income tax in a given year.
For purposes of the child tax credit, A qualifying child is someone who:
- Lives in your home for over half the year
- Is your child, stepchild, adopted child, or foster child, or your brother or sister or stepsibling (or a descendant of any of these),
- Is under 17 years old at the close of the year
- Does not provide over half of his or her own support for the year, and
- Is a U.S. citizen or resident.
The qualifying child must also be younger than you, must not file a joint return (other than a joint return filed solely to get a refund), and must be someone for whom you are allowed a dependency deduction. There are special rules that will help decide who is entitled to the child tax credit if more than one parent could claim the child as a dependent.
The dependency deduction that may be claimed for a qualifying child isn’t reduced or otherwise modified because of the child tax credit that is received. Important, where parents are divorced and the custodial parent signs away his or her right to the dependency exemption, the child credit is also lost. See more information about the EITC for divorced parents.
The child tax credit begins to get reduced as income increases
The child tax credit begins to get reduced as income increases. The amount of the credit allowable is reduced by $50 for each $1,000 (or part of $1,000) of modified adjusted gross income (AGI) above a threshold amount. This would be $110,000 on a joint return, and $75,000 for single filers and heads of household, and $55,000 for married individuals who file separate returns.
For example, a married couple filing jointly who have one qualifying child are entitled to a reduced credit of $950 if their modified AGI is more than $110,000 but not more than $111,000. They lose the credit completely if their modified AGI is more than $129,000.
Refundable Child Tax Credit
If the otherwise allowable child tax credit is more than the amount of income tax you owe, the excess is refundable to the extent of the greater of:
- 15% of earned income above $3,000 (for tax years beginning in 2009 through 2017), or
- for taxpayers with three or more qualifying children, the excess of the taxpayer’s social security taxes for the year over the taxpayer’s earned income credit for the year.
Earned income includes combat pay (excludable from gross income) for these purposes.
Taxpayers with earned income of $3,000 or less for 2009 through 2017 will not qualify for any refundable child tax credit under the 15% rule. However, they may qualify under the “excess of social security taxes over earned income credit” rule. Credits that cannot be used to offset income tax owed (because the credits exceed the amount of tax) and that aren’t refundable are lost.
If you expect the child tax credit to reduce your income tax, you may want to reduce your wage withholding. You can do this by filing a new Form W-4, Employee’s Withholding Allowance Certificate, with an employer If you qualify for the child tax credit, you may also qualify for the earned income credit. You can claim both credits if you meet the requirements for both. To calculate your precise added tax credit, you’ll have to complete a work sheet and fill out Form 8812 and send it along with your individual tax return.
Impact of the Child Tax Credit
Despite these shortcomings, the CTC is a powerful weapon against poverty. In 2013 it protected approximately 3.1 million people from poverty, including about 1.7 million children, and reduced the severity of poverty for another 13.7 million people, including 6.8 million children. The American Taxpayer Relief Act, enacted in January 2013, made the 2001 and 2003 expansions permanent but extended the 2009 provisions only through 2017.