Raising children is expensive, with recent reports showing a cost of over $200,000 throughout their lifetime. The child tax credit (CTC) can give you some money back during tax time, which can be helpful in covering those costs. It allows low- and moderate-income families to reduce their tax liability by up to $2,000 for each child under the age of 17 if he or she is a citizen. Taxpayers must also meet certain income rules, because the credit phases out for people with a higher income. Once your modified adjusted gross income (MAGI) goes over the limit of your filing status, the credit amount may be smaller. You might even be considered ineligible.
How the Child Tax Credit Works
The value of the child tax credit is 15% of a household’s adjusted gross income (AGI) above the first $2,500 of earnings until it reaches the maximum of $2,000 per child. Up to $1,400 of the credit is refundable as an additional child tax credit (ACTC), which taxpayers can receive if they don’t owe any taxes. But it’s reduced by 5% after their adjusted gross income reaches $200,000 for single parents or $400,000 for married couples. There’s also a $500 non-refundable credit for non-child tax credit dependents.
To qualify for the credit, your child must meet several criteria based on age, relationship, support, dependency, citizenship, and residence. The child must be under 17 years of age, biologically related to you, be claimed by you as a dependent, and not provide more than 50% of his or her own financial support.
If you have children who are U.S. nationals or U.S. resident aliens, they can qualify if they have lived with you for more than half of the previous calendar year. Stepchildren and foster children may also qualify for the child tax credit if they meet certain requirements. The Tax Cuts and Jobs Act (TCJA) also requires parents to verify each eligible dependent with a valid Social Security Number.
The Impact of the Child Tax Credit
The child tax credit has helped many working families since it was enacted in 1997. But over the years, it has been criticized by many people who claim that it provides little or no benefit to the poorest families (most of whom aren’t taxpayers and don’t file tax returns). When the credit was expanded during the pandemic, it had important implications for the economy as a whole, especially with regard to low and moderate-income families.
Certain emergency members were put in place and included prepayment of these benefits to eligible taxpayers. Some efforts were also made to reach out to families with low incomes who didn’t normally file tax returns when it was time to mail out checks. But even before the pandemic, a number of amendments were made to increase the Child Tax Credit amount while also widening its eligibility requirements. Refunds used to be restricted to taxpayers with three or more children. But for years, these benefits didn’t reach the poorest families.
The expandable and fully refundable child tax credit was put in place as part of the American Rescue Plan Act, which was meant to provide relief to the economic problems created by COVID-19. It also addressed many of the limitations that were considered problematic in the earlier versions of the child tax credit. The increase in the credit and the provision of total refundability made it accessible to even the neediest families.
How to Claim the Child Tax Credit
You can claim the child tax credit by entering your children and any other dependents on your tax return and attaching a completed Schedule 8812 (Credits for Qualifying Children and Other Dependents). To qualify for this credit, the child must be under 17 years of age. The child must also be one of the following:
- Son or daughter.
- Eligible foster child.
- Brother or sister.
- Stepbrother or stepsister.
- Half-brother or half-sister.
The child can also be a descendant of one of the above (such as a grandchild, niece, or nephew). Additional requirements for the child tax credit also include the following:
- The child must not provide more than half of his or her own financial support for that year.
- The child must have lived with you for more than half of that year.
- The child must be properly claimed as a dependent on your tax return.
- The child must be a U.S. citizen, U.S. national, or U.S. resident alien.
If you’re looking for a CPA in Corpus Christi to help you answer your questions about the child tax credit, be sure to reach out to Jennings & Hawley.