If you're a parent or have dependents, you need to know about the child tax credit. It can save you thousands of dollars on your taxes. Moreover, as a result of tax reform, far more people can get this credit than ever before.
A tax credit is a dollar-for-dollar reduction in the amount of income tax you must pay. For example, a $1,000 credit reduces your income taxes by $1,000. Credits are much better than tax deductions, which only reduce how much of your income is subject to income tax.
The child tax credit is a tax credit for parents and nonparents with "qualifying children" that they support. It's intended to help them bear the costs of raising children.
To qualify for the child tax credit, the following must be true:
To be a qualifying child, a child must meet six simple tests:
The child must also have a valid Social Security Number. You need to get this by the due date of your tax return. The due date is April 15, or October 15 if you obtain an automatic extension to file your return. The IRS has an online interview you can complete to see if you have a qualifying child for the child tax credit.
If you have a child or other dependent who can't meet all these requirements, you could qualify for a new $500 "credit for other dependents" For example, you could get the $500 credit if you have a child you support who is over 16 or who lacks a social security number. See the Child Tax Credit Worksheet in the Form 1040 instructions.
The maximum child tax credit is $2,000 per qualifying child. For example, if you have two children, your maximum credit is $4,000. But the credit amount phases out for high-income taxpayers.
Most people with qualifying children get the maximum $2,000 credit. However, the credit phases out for high-income people. The phase-out begins if your adjusted gross income (AGI) is over:
You calculate the phase-out on a credit-by-credit basis. Each $2,000 credit per child is phased out by $50 for every $1,000 your AGI exceeds the thresholds. For example, if a married couple has one child and their AGI is $420,000, they'll qualify for one $1,000 credit. If they have two children, they would qualify for one $1,000 credit and one full $2,000 credit. One $2,000 credit is completely lost if your AGI exceeds the applicable threshold by $40,000. For example, a married couple filing jointly loses one credit if their AGI exceeds $440,000. They lose two credits if their income exceeds $480,000, and so forth.
Your total child tax credits reduce your tax liability. For example, if you qualify for a $6,000 credit and owe $10,000 in income taxes, the credit will reduce your tax liability to 4,000. If your child tax credits exceed your tax liability, the excess is not paid to you by the IRS. In tax-speak, the credit is "nonrefundable" But you may be able to get a refund for the balance by claiming the "additional child tax credit."
The additional child tax credit is partially refundable. This means the IRS pays it to you even if it exceeds your tax liability. The refundable amount is equal to 15% of your taxable earned income. But the maximum refundable amount is $1,400 per qualifying child. Example: A couple owes $6,000 in income tax. They have four qualifying children and get a $8,000 child tax credit. Their child tax credit reduces their tax liability to zero. They have $2,000 in unused credits which they claim as an additional child tax credit. They qualify for a refundable additional child tax credit of $1,400. This means the IRS sends them a check for $1,400. To determine if you are eligible for the additional child tax credit, complete the Child Tax Credit Worksheet¬†in the Form 1040 instructions. The worksheet will determine if you should complete Schedule 8812 to see if you are eligible for the refundable portion of the credit.
The IRS has created a worksheet you can use to calculate the credit. But tax preparation software can do it for you as well.
You claim the basic child tax credit on IRS Form 1040, line 12a, and check the appropriate box in column (4) of the Dependents section. You must provide a social security number for each qualifying child. File Schedule 8812 with your income tax return to claim the child tax credit.
The Tax Cuts and Jobs Act (TCJA), the massive tax reform law that took effect in 2018, made the child tax credit much better for all taxpayers. The TCJA doubled the maximum amount of the credit from $1,000 to $2,000. The tax reform law also vastly increased the level of income taxpayers can earn and still obtain the credit. Under the old law, the credit phased out for marrieds filing jointly who earned $110,000 and for singles who earned $55,000. These thresholds are now $400,000 for marrieds and $200,000 for singles. It is expected to affect few taxpayers. The TCJA also made up to $1,400 of the credit refundable. Under prior law, no part was refundable For more information on the child tax credit, see IRS Publication 972, Child Tax Credit.