The government uses the tax code to shift the tax burden between different parts of the taxpaying population. The code gives certain tax breaks to families who are raising children, especially if those families are not among the wealthiest. The Child Tax Credit is one of the ways that the tax code provides relief for many middle class and lower income families. Although it is one way that single parents receive extra relief, it is not limited to single parents like the Earned Income Credit. Taxpayers can take the Child Tax Credit in addition to the Earned Income Credit and the Child Care Expense credit, and this credit is in addition to the personal exemption that can be claimed for any child.
The law provides for up to $1,000 in credits for each qualifying child. Unlike the test for whether a child is a dependent, the test for a “qualifying child” also includes a residency requirement. To be a qualifying child, the child must be a son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (e.g. a grandchild, niece, or nephew). The child must have been under age 17 at the end of the tax year in question, did not provide more than half of his or her own support in that year, and must have lived with the person claiming the credit for more than half of the tax year. In addition, although the test for qualifying children is more restrictive than for a dependent child, you still must claim the dependent child on that tax return.
The following are some examples of children who will not qualify for the purposes of the child tax credit. If a child lives with one parent but is claimed on another parent’s tax return as a dependent, then neither of the parents can claim the credit. The one who lives with the child does not meet the test for claiming the child as a dependent, and the one who claims the dependent does not meet the requirement that the child live with the parent. If a child works and provides much of his or her own support, there is no tax credit. Taking all the requirements together, the credit is directed at children who live with you and are too young to provide some support to the family by working outside the home. In the year that the child turns 17, or in any year that a younger child provides support for himself or herself, the credit ends.
The credit is available for taxpayers who have a modified adjusted gross income under $55,000 if married and filing separately, below $75,000 if single or head of household, or below $110,000 if married filing jointly. The “modified” adjusted gross income is your AGI plus a few items that do not apply to most taxpayers.
Claiming the credit requires that you file either form 1040 or 1040A. It is not available for taxpayers who file form 1040EZ. If you think that you are eligible for the child tax credit, and would otherwise file a form 1040EZ, invest the extra time to fill out the longer forms. The child tax credit is referred to as a “nonrefundable” credit because it will not result in a refund above and beyond the tax that you already owe. The best the credit will do is to reduce your tax due to zero. Nevertheless, the credit is a very powerful tax incentive. A $1000 tax credit is the same as a deduction of nearly $6,700 of income for a taxpayer in the 15% marginal income tax bracket and this applies to each qualifying child.
Carefully checking which credits and deductions apply to you is the best way to minimize your tax bill. One of the best ways for lower and middle income families with younger children is the use of the child tax credit.