The child tax credit provides a tax break to people with children. Depending on the situation, it can make a very meaningful difference to a family’s tax situation.
What is a credit?
Before discussing the child tax credit, it is important to know what a tax credit is in the first place. Tax credits reduce tax liability dollar-for-dollar. A credit is different from a deduction, because a credit reduces tax and a deduction just reduces taxable income. If you would like to review the basic income tax formula, you can read our post from last year.
To qualify for the child tax credit, a taxpayer must have a qualifying child and their AGI must not exceed certain limits.
Dependent must be a qualifying child
Taxpayers can claim the child tax credit if they have one or more dependents who meet the definition of a “qualifying child.” To be a “qualifying child,” the dependent must:
Be a dependent on the taxpayer’s return.
Not file a joint return of their own.
Be a citizen, national, or resident alien and have a social security number.
Have lived with the taxpayer for more than half the year.
Not have provided more than half of their own support.
Be related to the taxpayer in one of the following ways:
Son, daughter, stepson, stepdaughter, adopted child, foster child, brother, sister, half-brother, half-sister, stepbrother, stepsister. The child can also be a descendant of any of these listed persons.
Be under age 17 at the end of the year.
If the dependent is not a qualifying child for the child tax credit, they still may qualify for the “credit for other dependents,” which we are not going to discuss here.
Taxpayer's AGI must not exceed certain limits
The child tax credit is only allowed if the taxpayer has adjusted gross income (AGI) below a certain threshold, based upon their filing status. The maximum AGI to receive the full credit is $400k for married filing jointly status and $200k for other statues. Above these AGI thresholds, the amount of the credit phases-out.
There are also rules about claiming the credit if the taxpayer files form 2555 for foreign earned income. We will not be discussing this here.
The credit can be up to $2,000 per child
The full amount of the child tax credit is $2,000 for each qualifying child. Again, a credit reduces tax dollar-for-dollar. So, a family with three qualifying children may be able to reduce their taxes by $6,000 (2,000 * 3). As mentioned above, the credit can be limited in certain circumstances.
The child tax credit is non-refundable, meaning that it is only allowed until all tax has been reduced. However, the “additional child tax credit,” which works in tandem with the child tax credit, allows for a part of the credit to be refundable – the taxpayer may receive a refund even if their tax liability is $0.
Up to $1,600 per child can be refundable
The “additional child tax credit” can be thought of as the refundable part of the child tax credit. It allows up to $1,600 per qualifying child to be refunded.
The child tax credit and additional child tax credit are combined – the maximum total credit is still $2,000. For example, let’s say a couple’s child tax credit is limited to $1,200 per child, because their total tax is reduced to $0. Then the additional child tax credit will be $800 per child – $2,000 total between the two credits.
However, if the child tax credit was limited to $100 per child, the additional child tax credit would be limited to $1,600 per child – the total credit per child cannot reach the $2,000 limit, because of the separate additional child tax credit limit.
There are other limits involved in the additional child tax credit, that we will not go into here.
Example
The following example is overly simplified and doesn’t consider other factors beyond just illustrating the child tax credit.
Let’s say Reese and Joy are married and file their taxes jointly. They have three qualifying children. Their AGI is $50,000 and before credits they are going to pay $2,500 in taxes. They would receive a $2,500 child tax credit and $3,500 additional child tax credit:
If you have any comments, questions, or ideas for future posts, please let me know
I hope you found this post helpful and educational. If you have any comments, questions, or ideas for future posts, please let me know. You can reach me directly via email at crawford@ulmerfinancial.com.
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