Understanding The Child Tax Credit

The government has continually helped families financially by providing generous tax credits and deductions to those who have kids and have low to moderate family income. Families with children can avail tax deductions such as the dependency exemptions and tax credits such as the child tax credit, dependent care credit, earned income credit, etc. However, people should not have more children than they can afford to just to get these tax breaks. It takes a lot of money to raise a child and the cost could be more than the credit that you’re going to get.

The Working Families Tax Relief Act of 2004 created a maximum child tax credit of $1,000 per qualifying child for tax years 2005-2010. A qualifying child must be under the age of 17 at the end  of  the tax year and the child could be the son, daughter, brother, sister, step child, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (grandchild, nephews or niece). In addition to those two, the following test must also be met:

  • The child did not provide over half of his or her support during the tax year.
  • The child must have lived with you for more than half of the tax year.
  • The child must be claimed as dependent on your return
  • And the child must be a US Citizen, US national, or a resident of the United States.

Figuring Out Your Credit

The maximum amount you can claim is $1,000 for each qualifying child. The credit is a non-refundable credit, meaning you can only take the credit up to the amount of your tax liability. In addition, if you do not owe any taxes, you cannot claim the credit.  You must reduce the amount of the tax credit if your modified adjusted gross income (AGI) is above $110,000 for married filing jointly, $55,000 for married filing separately or $75,000 for single, head of household or qualifying widower.

Claiming the Credit

You must file Form 1040 or Form 1040A to claim the credit. You cannot take the credit if you are filing Form 1040EZ. You must also provide the name and social security number for each qualifying child on your tax return.

Additional Child Tax Credit

The credit applies for certain taxpayers who did not get the full amount of the child tax credit. Unlike the regular child tax credit, additional child tax credit is refundable, meaning that you can take the refund even if you do not owe any taxes. The credit is equal to the lesser of the unallowed Child Tax Credit, or 15% of your earned income that is more than $3,000. Tax-exempt combat pay counts as earned income for calculating the Additional Child Tax Credit. If your earned income is not more than $3,000 and you have three or more qualifying children, you may be able to claim the Additional Child Tax Credit up to the amount of Social Security taxes that you paid for the year. If you are eligible to receive the Earned Income Tax Credit, the maximum amount of Additional Child Tax Credit under this method is the total amount of Social Security taxes less the amount of the Earned Income Credit for which you are eligible.

To claim the credit:

1. Figure the amount of your regular child tax credit

2. If you answered “yes” on line 9 or line 10 of the Child Tax Credit Worksheet (Form 1040 or form 1040A) or line 13 of the Child Tax Credit Worksheet in Publication 972, use form 8812 to see if you can take the additional tax credit

3. If you have an additional child tax credit on line 13 of Form 8812, enter it to line 65 of Form 1040 or line 42 of Form 1040A

Source irs.gov, Pub 17 and Pub 972

Comments

  1. Tanya says:

    I find the whole tax issue a nightmare to deal with. Is there a final date by when you can claim the child tax credit?

    • Ken says:

      I’m not sure I understand your question on the final date. The child tax credit can be claim when you file your taxes. The tax filing date should be April 15 for the most part (except when the date fall on a holiday).

      The amount used to be $500 and with the Bush tax cut, it was increased to $1,000. However, depending on what Congress enacted, the child tax credit will return to the $500 amount.