Designed to help taxpayers who are the parents or guardians of children under 17, the Child Tax Credit is one of several tax benefits the IRS has made available to families. Parents and guardians may receive a credit of up to $1,000 for each child they are able to legally claim as a dependent. Although claiming the Child Tax Credit may seem straightforward, parents and guardians should know the following five facts when filing their tax returns.
- Since there are other requirements in addition to having a dependent child under the age of 17, not everyone will qualify to receive the credit. For example, the child must be 16 years old at the end of the tax year. If the child is claimed as a dependent by someone other than his or her parent, the guardian's adjusted gross income must be higher than the adjusted gross income of either parent. The child must also live with the claiming adult for more than half the year.
- The Child Tax Credit is reduced based on the taxpayer's income for the year. The reduction begins to apply when the parent or guardian's income reaches $55,000 for married couples who file separately, $75,000 for those who file as single, head of household, widow, or widower, and $110,000 for couples who file jointly. For those whose income is above the applicable maximum, the tax credit is reduced by $50 for each $1,000 over the threshold.
- A portion of the Child Tax Credit may be refundable. Claiming the Child Tax Credit may result in a person's tax liability being reduced to zero. Any remaining portion beyond the taxpayer’s liability may be refunded.
- There are two ways to calculate the refundable amount of the Child Tax Credit if a filer has zero tax liability. For filers who have one or two children, the refundable amount will either be the unused portion of the credit or 15 percent of the filer's earned income over $3,000, whichever is smaller. For those who have three or more children, the refundable amount is the smallest of the following three amounts: the unused portion of the tax credit, 15 percent of the earned income over $3,000 or the sum of Social Security and Medicare taxes paid minus the earned income credit.
- Military personnel may choose whether to include combat zone pay as earned income when calculating the refundable portion of the Child Tax Credit. Deciding whether to include combat pay can be effectively used as a tax planning strategy for maximizing the potential of receiving a larger tax refund.
Parents and guardians should consult a tax professional when applying for Child Tax Credit. Each taxpayer's financial background is different; therefore, each person may realize different advantages and disadvantages when claiming the Child Tax Credit.
