If you have qualifying children who are under age 17 at of the end of the calendar year, you could reduce your tax liability by up to $2,000 per child with the Child Tax Credit. Here's what you need to know.
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Credit worth as much as $2,000 per child
If you have children who are under age 17 at of the end of the calendar year, you could receive a tax credit of up to $2,000 per child on your tax return. A tax credit reduces your tax bill dollar-for-dollar, so three qualifying children, for example, can cut what you owe Uncle Sam by $6,000. However, the credit is cut back if your income exceeds the levels listed below.
It is important to understand that the credit does not affect the exemption deductions you take for dependent children. The child tax credit is in addition to those deductions.
To claim the credit
To qualify for the credit, you must meet these basic requirements:
- The dependent must be a U.S. citizen or resident.
- You can claim your child, stepchild, adopted child, grandchild or great-grandchild.
- Under a recently revised definition of "qualifying child," you can also claim the credit for siblings, step-siblings and half-siblings that live with you.
- Foster children qualify if they were placed with you by a court or authorized agency.
- To claim the credit, children must live with you more than half the year and must not provide more than half of their own support.
- You must report each qualifying child's Tax Identification Number (TIN) on your return. It's usually the child's Social Security number.
Tip: Check your withholding
Because a child tax credit reduces the amount of tax you owe for the year, it may also reduce how much you need to have withheld from your paychecks. If you get a substantial tax refund, review the W-4 form on file with your employer to avoid having too much money withheld.
- Your W-4 is the form that controls how much income tax is withheld from your wages.
- You may need to increase the number of allowances you claim to reflect the tax savings you receive through the child tax credit.
Additional Child Tax Credit makes a portion refundable for some taxpayers
Up to $1,400 of the $2,000 credit is refundable with the Additional Child Tax Creidt. If your credit is bigger than your tax liability, your tax bill is just reduced to zero. Any remaining unused amount of the non-refundable portion of the credit is lost.
However, in certain cases, you can get a child tax credit refund when the credit exceeds your tax liability. This means that you would get a check for the remaining child tax credit after your tax bill has been reduced to zero.
- If you have one or more qualifying children and more than $2,500 of earned income (income from wages and other job-related compensation), you may be entitled to a refund of up to 15% of your earned income (including tax-free combat pay) in excess of $2,500.
- If you have three or more qualifying children, paid Social Security taxes that exceeded your earned income credit, and your earned income is less than $2,500, you may be eligible for a refundable credit.
Credit is phased out at higher income levels
The child tax credit is reduced or eliminated if your modified adjusted gross income (MAGI) is above certain thresholds. The credit amount is reduced by $50 for each $1,000 (or fraction thereof) by which the taxpayer's MAGI exceeds the threshold amount.
The threshold is:
- $400,000 on a joint return
- $200,000 for all others
How the income limit works
A married couple has two children under age 17 and they file a joint return with an income of $50,000.
- $2,000 per child x 2 children = $4,000 total credit amount
- $50,000 is well below the $400,000 phase-out threshold.
- They can claim the full $2,000 child tax credit per qualifying child, $4,000 total, since the credit does not exceed their tax liability.
Another married couple also have two children under age 17, but their joint income is $420,000.
- $2,000 credit per child x 2 children = $4,000 total credit amount
- Their combined income exceeds the $400,000 phase-out threshold for married couples by $20,000, so they must reduce their credit by $50 for every $1,000 they are over the limit.
- $20,000 ÷ $1,000 = 20
- $50 x 20 = $1,000 reduction of the credit
- After the reduction, the couple could claim only a $3,000 child tax credit.
- $4,000 total credit amount - $1,000 reduction = $3,000 final credit amount
Note: the credit is reduced by a total of $50 for each $1,000 your income exceeds the threshold, not by $50 for each child for whom you claim the credit.