What Is the Child Tax Credit?

FT Contributor
An adult couple doing their taxes on a couch with their child in the middle of them.
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Looking to increase your tax refund? As a parent, the child tax credit (CTC) can help! It is one of the three kid-focused tax credits that can help reduce what you owe on your taxes, including the Adoption Tax Credit and the Child and Dependent Care Credit. The child tax credit is worth up to $2,000 for every qualifying child. Claiming children as dependents can help you save thousands of dollars on your taxes in the form of increased standard deductions. Plus, if your tax liability goes below zero, you may be eligible for a refund. Here, we’ll define who you can claim as a dependent, how much the child tax credit is worth, and what expenses you can claim so that you can benefit the most from this tax credit.

How Much Is the Child Tax Credit?

What you receive in credit is determined by how many dependents you claim. Taxpayers can receive up to $2,000 per dependent claimed and $500 for every dependent that cannot be claimed for the child tax credit. It is important to note that ultimately, your total income is what determines how much you get for each dependent claimed. If you’re claiming a dependent on your taxes, you need to have earned at least $2,500. If you’ve earned more than $200,000 as a single filer or $400,000 as a joint filer, you are only eligible for partial credit.

Remember, tax credits help reduce what you owe to the IRS. If your tax bill is $3,500 and you’re eligible for $2,000 in tax credits, you only owe the government $1,500. Tax credits are different from tax deductions, which lessen the amount of your income that is taxable.

The child tax credit is refundable up to $1,400. If you qualify and the CTC brings what you owe in taxes to below zero, you’re still eligible to receive a credit of $1,400. There is also a $500 non-refundable credit for each non-child dependent. Unlike the tax credit for children, you may not receive that $500 credit should your tax liability go below zero because of a dependent.

How to Qualify for the Child Tax Credit

If you are the parent of a child under the age of 17, you can receive a credit of up to $2,000 per child on your tax return. There are certain limitations to the child tax credit. For instance, if your income exceeds a certain amount, you are not eligible for this tax break. It’s important to note that the child tax credit does not affect the exemption deductions that you take for your dependent children. This tax credit is in addition to those deductions.

In order to claim the child tax credit, you must meet the basic requirements:

  • Your child must be a U.S. citizen or resident.
  • You can claim your child, stepchild, or adopted children, as well as grandchildren and great-grandchildren.
  • An updated definition of a “qualifying child” states that you may also claim the child tax credit for siblings, step-siblings, and half-siblings that you are taking care of.
  • Foster children also qualify if they were placed with you by an authorized court or agency, as do parents or other qualifying relatives supported by the taxpayer.
  • Any child claimed must not provide more than half of their own support and they must have lived with you for at least six months out of the taxpaying year.
  • When filing, you must use each child’s qualifying tax identification number (TIN), which is usually their Social Security number.

Child Tax Credit Phase-Out

Tax credits like this one help offset the cost of raising one or more children. In years past, if you earned more than a certain amount, you were not eligible for the child tax credit. This threshold was recently adjusted to include high-income families with children under the age of 17.

Despite this change, the tax credit is less for higher-income families. The credit amount begins to phase out for families with a $400,000 modified adjusted gross income (MAGI) on their joint tax returns or $200,000 MAGI on all other returns. The phase-out happens at a rate of $50 worth of credit for every $1,000 worth of MAGI.

Often, your MAGI is the same as your adjusted gross income. To calculate your own MAGI, add back certain deductions that you may have taken out to get your adjusted gross income (AGI). For married taxpayers filing a separate return, the phase-out begins at $55,000. For all other taxpayers, the phase-out amount is $75,000.

For example, say a married couple’s income is $410,000 for a tax year. They claim one child on their tax return, but because their income is over the phase-out threshold, the amount of the child tax credit they can claim is reduced to $1,500. This is calculated by taking the dollar amount that the taxpayers go over the threshold (in this case, $10,000) and dividing that by $1,000. That number (10) is multiplied by the phase-out amount ($50) and subtracted from the eligible amount ($2,000). In this example, $2,000-$500 = $1,500, which is the credit this family is eligible for.

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