Child Tax Credit Guide: How Much are You Eligible For?

There’s no better joy than bringing a child into this world. From their first words to sending them off to college and everything in between, children bring unending happiness to our lives. However, taking care of a child (or multiple children) for 18+ years can get pretty expensive. Food, clothes, healthcare, education, you name it—raising a child costs a lot of money.

Fortunately, the Child Tax Credit was introduced to help offset the cost of parenting and to expand opportunities for children—especially for those in low- to middle-income families. Depending on your income level, you may qualify for up to $2,000 per child with the Child Tax Credit. To learn more about ways you can save money with the Child Tax Credit, explore our tax preparation services or continue reading below.

What is the Child Tax Credit?

The Child Tax Credit (CTC) was enacted by Congress in 1997 and has received bipartisan support since 2001 to help working families raise their children. It lowers the tax obligation of qualifying parents (or guardians) of children and other dependents who are younger than 17 years old. Studies show that it can cost up to $245,000 to raise a child from birth to 18 years old, but the CTC provides relief to this staggering amount by giving a tax credit to working families worth up to $2,000 per child, depending on income. In order to qualify for the CTC, you must make at least $2,500 annually.

How do tax credits work? The CTC reduces your tax bill dollar-for-dollar. For example, if you owe the IRS $3,500 in taxes and have one child eligible for the full $2,000 CTC, your tax bill will be reduced to $1,500.

When President Trump signed the Tax Cuts and Jobs Act in 2017, he not only raised the CTC credit from $1,000 to $2,000 per child, but he also made the CTC refundable. This means if you owe $3,500, but have two qualifying children eligible for the full $2,000 credit, the IRS will refund you the remaining credit of $500. The refundable CTC is called an Additional Child Tax Credit Tax (ACTC) and is refundable up to $1,400 to provide support to families with dependents.

What’s the difference between a tax credit and a tax deduction?

The difference between a tax credit vs deduction is that a tax credit directly reduces the sum of taxes you owe, dollar-for-dollar, while tax deductions are dependent on marginal tax brackets and only lower overall tax liability (taxable income). A deduction decreases your tax bracket, so if you are in the 25% tax bracket and have a $1,000 deduction, $250 will be taken from your total tax liability, leaving you with $750 to pay. If you owe $1,000 and have a $1,000 credit, the credit will lower your tax bill to $0.

How to determine if a child qualifies

Not every child is eligible for the child and dependent care credit. In order to qualify, a child or dependent must pass a series of tests set in place by the IRS. Below are the Child Tax Credit facts for each of the tests.

Age Test

To qualify for the CTC, a child must be under the age of 17 at the end of the tax year.

Relationship Test

The child must also be your son, daughter, stepchild, foster child, adopted child, brother, sister, stepbrother, stepsister, or a descendant of any of these individuals, including your grandchild, niece, or nephew.

Support Test

In order to claim the Child Tax Credit, the child must not have provided more than half of their own financial support. This refers to money for living expenses such as food and housing.

Dependent Test

To receive the dependent tax credit (otherwise known as the CTC), the child must be claimed as a dependent on your federal tax return. Additionally, a child cannot file a joint return for the year, unless they only file it to claim a refund of withheld income tax or estimated paid tax.

Citizenship Test

The child must be a U.S. citizen, U.S. national, or U.S. resident alien in order to pass the citizenship test.

Residence Test

The child must also have lived with you for more than half of the tax year. There are some exceptions, which can be found in IRS Publication 972, Child Tax Credit.

Family Income Test

Depending on your tax-filing status, the Child Tax Credit may be reduced based on your modified adjusted gross income. If your income is over $200,000 as a single filer or $400,000 as a joint filer, the credit will begin to phase out (decrease), with $50 being subtracted for every $1,000 of income above the threshold.

How to apply for the Child Tax Credit

After you’ve determined that your child or children qualify for the CTC, you’ll need to apply for the credit. When you file your personal federal income tax return, you must complete Form 1040. On Form 1040, you’ll find instructions on line 12a (or line 49 for Form 1040NR) to complete the Child Tax Credit and Credit for Other Dependents Worksheet.

If you meet the conditions listed at the end of the worksheet, the IRS will require you to fill out Schedule 8812 to see if you’re eligible for the Additional Child Tax Credit. You’ll need to fill out Schedule 8812 if the total credit amount you’re owed is less than the full CTC, and how to then calculate the ACTC.

So, if you owe less tax than the credit you’re due, Schedule 8812 will help put more money in your pocket. It’s important to remember you can’t request the CTC later in the year, so you must attach this form to your federal tax return to receive some significant savings.

Which parent should claim a child on taxes?

The IRS only allows one parent (or married couple filing jointly) to claim a child or dependent on their federal tax return to be eligible for the CTC and ACTC. If two parents claim a child as a dependent on their federal tax return, the IRS will use a set of tiebreaker rules to determine which parent will get the credit. However, if the IRS finds that you disobeyed the rules, you will be ineligible for the CTC for two years. This is why it’s important to receive help from a tax professional for assistance with the IRS to ensure proper filing.

In Conclusion

Filing the Child Tax Credit may provide you with much-appreciated savings. With up to $2,000 per child deducted from your tax bill and a chance for a tax refund, parents have more money to support their family. Whether that money is spent on food, clothes, education, or a weekend getaway, the CTC is a major help to working parents. As an added bonus, this credit isn’t viewed as a source of income, so it will never be taxed. Consult with one of our trusted experts at Community Tax to see if you qualify!