What is Child Tax Credit?
Child Tax Credit is a non-refundable credit that reduces your tax bill dollar for dollar. The maximum amount that can be claimed for the credit is $2,000 for each child under the age of 17 who qualifies for the Child Tax Credit (CTC). Whether you would qualify for a CTC depends on your filing status, whether the child can be claimed as a dependent or not and the child’s date of birth. An important fact to note is that the Child Tax Credit is limited to the amount of tax on your return. You cannot receive the excess credit as a refund.
The credit is reduced by 5% of adjusted gross income over $200,000 for Single parents and $400,000 for married couples. If the credit exceeds taxes owed, you can receive up to $1,400 of the balance as refund, known as the Additional Child Tax Credit (ACTC).
To be able to claim the Child Tax Credit, a qualifying child should pass all the tests listed below:
- Age: The child must be less than 17 years of age at the end of the tax year.
- Relationship: Your son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, step sister, half-brother, half-sister, or a descendent of any of them (your grandchild, niece, nephew) may be a qualifying child.
- Dependent: The child is claimed as a dependent on your tax return and that the child is not claimed on someone else’s tax return.
- Joint Return: He does not file a joint return for the year unless the only reason they are filing is to claim a refund.
- Support: The child did not provide for over half of his or own support for that tax year.
- Residence: The child lived with the taxpayer for more than half of the year.
- Citizenship and SSN: It is mandatory for the child to have a Social Security Number (SSN). ITINs (Individual Tax Identification Number) and ATINs (Adopted Tax Identification Number) are not accepted. The child must be a citizen, national or resident of the United States.
What if my child lives with his other parent? Can I still claim the dependency exemption for him? Who gets to take the child tax credit?
You can take the dependency exemption if you meet the other requirements (listed above) and avail benefits of a Child Tax Credit, even if the child does not live with you.
Form 8332, Revocation of Release of Claim to Exemption for Child by Custodial Parent needs to be signed by the other parent and attached to your tax return.
Other exceptions to the residency rule:
If the child was born and died in the same year and your home was the child’s home for more than half the time he or she was alive, then the child is considered to have lived with you for more than half of the tax year. You might be eligible to claim the credit in this case.
Temporary absences by you or the child under special circumstances such as school, college, vacation, business, medical care, military service, or detention in a juvenile facility, you can count as time the child lived with you.
Special rules apply for kidnapped children and children of divorced or separated parents. There also happen to be special rules in case the child is the qualifying child of more than one person. Please talk to your tax consultant for details in case you think the rules might apply to you.
CTC is limited if the modified adjusted gross income is above a certain threshold amount.
For Married Filing Jointly, the phase out begins at $110,000.
For Married Filing Separate, it begins at $55,000. For all other filers, the phase out begins at $75,000. Also, that the CTC is limited to the amount of income tax you owe plus any alternative minimum tax that you might owe as well.
Form to use
To calculate the CTC, the taxpayer needs to fill in Form 1040, Form 1040A or Form 1040NR. You also need to figure out the amount of earned income that you enter on Schedule 8812, Child Tax Credit. You might have to use a few additional worksheets as well.
If the Child Tax Credit is erroneously or fraudulently claimed even though you are not eligible for the credit, and it is later on determined by the IRS that the error was caused due to reckless or intentional disregard of the CTC rules, then you will not be allowed to claim the credit for two years.
Please note that Child Tax Credit is different from Child and Dependent Care Tax Credit, Credit for Other Dependents and Additional Child and Tax Credit. Briefly, we just saw what a child tax credit is, who qualifies for it, what are the income limitations, penalties in case of incorrect CTC claims and the forms to use while filing it.
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