Let's discuss tax credits related to children - Part 4

We have discussed the Child and Dependent Care Expenses and Earned Income Credit, now it's time to cover the Child Tax Credit.

The credit is a non-refundable credit allowed for the taxpayer that takes a dependency exemption for a qualifying child. The maximum amount is $1,000 per child, but is limited to tax liability (non-refundable credit). A portion of the credit may be taken as the Additional Child Tax Credit by taxpayers under certain income levels and this is a refundable credit.  The Child Tax Credit is reduced by $50 for every $1,000 of Adjusted Gross Income over $110,000 (Married Filing Jointly), $75,000 (Single, Head of Household and Qualiying Widow(er)) or $55,000 (Married Filing Sepeately).

For the purposes of the Child Tax Credit the same rules apply as the rules used to determine qualification to claim the dependency exemption plus some additional criteria.  A qualifying child is:

1. Is the taxpayer’s son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (for example, grandchild, niece, or nephew),
2. Was under age 17 at the end of the tax year,
3. Did not provide over half of his or her own support during the year,
4. Lived with the taxpayer more than half of the tax year,
5. Is claimed as a dependent on the taxpayer’s return, and
6. Was a U.S. citizen, a U.S. national, or a U.S. resident alien. If the child was adopted (see Adopted Child below).

An adopted child is alway treated as the taxpayer's child.  If the taxpayer is a U.S. Citizen or U.S. National and the adopted child is a member of the taxpayer's home for the entire year item 6 above is satisfied.  There are certain circumstances such as school, vacation, business, medical care, military service, or detention in a juvenile facility that are allowed exceptions to the time requirement in the taxpayer's home.

The Additional Child Tax Credit is the portion of the Child Tax Credit that was not refunded.  Any amount of the CTC not refunded due to the income phaseout cannot be refunded through the additional credit.  The amount of the credit is determined by whether the taxpayer has one or two children, or three or more children.  The maximum additional credit allowed cannot be more than the unused portion of the CTC and is:

1. For one or two children - 15 percent of earned income in excess of $3,000
2. For three or more children - The larger of: 15 percent of earned income in excess of $3,000, or FICA and Medicare tax paid minus EIC

The Child Tax Credit is filed directly on the Form 1040 and no additional form is required.  The Additional Tax Credit is figured using the Form 8812 and the result is carried over to the 1040.  I hope the coverage of these credits along with the discussions about the EIC and dependent care expenses have been beneficial.  If you have any topics that you are interested in please contact me and I'll be happy to consider the request.  You may also feel free to contact me with any questions related to the topics covered in this series.