Whether you have children or you’re planning to have them, you might be wondering how these additions to your family will impact your taxes. The child tax credit is designed to help families that have children.
At Cook Martin Poulson, many of our clients have families. We work with them every year to minimize their tax burden and ensure they take every credit they’re entitled to take. Here’s what you need to know about the child tax credit.
What is the Child Tax Credit?
The Child Tax Credit is a credit that may be taken by families with children under the age of 17 and certain children between the ages of 17 and 18, and 19 and 24. This tax credit is designed to help parents offset the expenses associated with raising children.
As part of the Taxpayer Relief Act of 1997, the Child Tax Credit originally allowed for 15 cents of credit for every thousand dollars earned over the first $3,000 of earnings. The allowable credit amount has increased over time and changes were made to accommodate rising costs of living and the costs associated with older children who may not qualify for the tax credit as it was originally created.
Difference between the Child Tax Credit and Dependent Care Tax Credit
Many tax credits have similar names so it can sometimes be confusing for taxpayers to understand which credits they can take. One area that many of our clients ask about is the difference between the Child Tax Credit and the Dependent Care Tax Credit.
The Dependent Care Tax Credit is available in order to offset the expenses associated with caring for a child, such as day care or in-home childcare. It is separate from the Child Tax Credit, which is designed to offset the everyday costs of raising a child, including expenses such as food, clothing, and healthcare.
You can qualify for the Dependent Care Tax Credit if both you and your spouse work outside the home, or if one of you has a disability, is a full-time student, or is unemployed and looking for work. Some families may be eligible for both credits.
How Does the Child Tax Credit Work?
The Child Tax Credit is not as complicated as some of the other tax credits. The credit is calculated based on the number of children you have, their ages, and your income. You can then use the credit to get a dollar-for-dollar reduction of your tax liability.
For some families, this credit may be enough to move them into a lower tax bracket. Even if it doesn’t, it could mean that your family gets a larger tax refund than you would otherwise have received – or that you owe less to the government than you would have.
How to Qualify for the Child Tax Credit
The qualifications for the Child Tax Credit are relatively simple. Any family with dependent children under the age of 17 may qualify.
Families with high income may not qualify for the credit because the amount of the credit reduces incrementally as income rises. However, the income levels are such that most working families will qualify for all or some of the tax credit.
How Much is the Child Tax Credit: 2019 vs. 2020?
For the 2019 tax year, the amount of the child tax credit per child under the age of 17 was $2,000. Up to $1,400 of that amount may be refundable if you qualify for the Additional child Tax Credit.
You may also take up to $500 per child for children who are:
- Between the ages of 17 and 18; or
- Between the ages of 19 and 24 who are full-time students; or
- Meet certain other requirements, such as disability.
As of June 2020, there is no reported change in the amount of the Child Tax Credit for 2020. In other words, we anticipate that the amount of the credit will remain at $2,000. The $1,400 available refund for the Additional Child Tax Credit was designed to increase with inflation but may only be increased in increments of $100. We expect that it will remain at $1,400 for the 2020 tax year.
How to Get the Child Tax Credit
To get the Child Tax Credit, you must meet the following qualifications that were outlined in 2019:
- You must claim the child as a dependent on your tax return.
- The child must be your biological child, an adopted child, or a foster child. You may also be able to claim a sibling, half-sibling, or other relative if you claim them as a dependent on your tax return.
- Your child must be a citizen of the United States, a US national (meaning they were born in American Samoa or the Marianas Islands) or a US resident alien.
- Your child must have lived with you for more than 6 months of the tax year.
- The child must not have earned more than half of their own support for the year.
You must also meet certain income requirements to receive the full tax credit. If you earn more than $200,000 ($400,000 if married filing jointly), the credit amount will be reduced by $50 for each $1,000 above the limit that you earn.
To qualify for the Additional Child Tax Credit and receive a refund for up to $1,400 of your Child Tax Credit, you must:
- Earn at least $2,500 within the tax year in question; and
- Have credits that exceed the amount of your tax liability; or
- Have three or more children and paid Social Security taxes that exceeded your Earned Income Credit
You can claim the Child Tax Credit on Form 1040, Line 12a; or on Form 1040NR, Line 49. Use IRS Form 972 to determine your eligibility and calculate the amount of your credit.
Recent Changes to the Child Tax Credit
The most recent significant changes to the Child Tax Credit were part of the Tax Cuts and Jobs Act (TCJA) of 2018. The biggest change was that this legislation increased the amount of the tax credit from $1,000 per eligible child to $2,000 per eligible child. It also increased the phase-out income to $200,000 for individuals and $400,000 for married filing jointly.
Another significant change was that the TCJA added the $500 credit for dependents between the ages of 17 and 18. It also decreased the amount a family must earn to qualify for the Additional Child Tax Credit to $2,500 from its previous level of $3,000.
As the law currently stands, the Child Tax Credit would return to its previous amount of $1,000 per eligible child by 2025 unless Congress makes the increased amount permanent.
Impact of the Child Tax Credit
The real impact of the Child Tax Credit depends largely on your income level. According to the Tax Policy Center, the changes break down as follows:
- Families in the lowest 20% of earners received an average reduction of $60 in their tax burden
- Families in the highest 20% of earners received an average reduction of $390 in their tax burden
Families with less than $2,500 in income do not qualify for the credit and thus received no benefit from the changes in the TCJA.
For some working families, the Child Tax Credit can make a small difference in the amount of taxes they pay. Families with multiple dependents may experience enough of a reduction to earn a refund if they qualify for the Additional Child Tax Credit.
Families with one or more children under age 17 may be able to save money on their taxes by taking the Child Tax Credit and the Additional Child Tax Credit. To find out if you qualify, use IRS form 972 or speak to an experienced CPA.
Do you need assistance filing your taxes or calculating your tax credits? Cook Martin Poulson professional tax advisors can determine your eligibility and assure that you’re getting the best possible deal on your taxes.
Looking for more ways to save on your taxes?
You may be surprised to learn that you qualify for a variety of deductions. Download our Checklist of 11 Surprising Tax Deductions to learn more.