Child Tax Credit
Posted on August 19, 2008
Filed Under Credits, Federal Income Tax
Taxpayers can take a $1,000 tax credit through 2010 for each qualifying child under age 17. Except for taxpayers who qualify for the Additional Child Tax Credit (see below), the child tax credit is nonrefundable and taken against the sum of regular and alternative minimum tax (AMT) liability. The difference between refundable and nonrefundable tax credits is important as refundable credits, unlike their nonrefundable cousins, can be used to offset taxes other than the income tax and reduce or eliminate the recapture of other tax credits.
The order of personal tax credits is important in the case of the child tax credit. Specifically, nonrefundable personal credits must be taken in the following order:
- Credit for child and dependent care expenses;
- Credit for the elderly or the disabled;
- Education credits, that is, Hope and Lifetime Learning Credits;
- Residential energy credits;
- Foreign tax credit;
- Child tax credit;
- Retirement savings contributions credit;
- Home mortgage interest credit;
- District of Columbia first-time homebuyer credit;
- Qualified adoption expenses credit;
- Alternative motor vehicle credit; and
- General business credit.
The child tax credit is subject to phase out when modified adjusted gross income (AGI) is over $75,000 for head of household filers, single taxpayers, and surviving spouses; $110,000 for taxpayers married and filing jointly; and $55,000 for taxpayers married and filing separately. (Note: Modified AGI is AGI increased by the following items: student loan interest deduction, tuition and fees deduction, foreign earned income exclusion, foreign housing deduction or exclusion, deduction for domestic producers, and several other items not relevant to the discussion in this article.) The $1,000 credit is reduced or phased out by 5% for each $1,000 increment of AGI above the threshold.
Example 1: Assuming only the existence of the child tax credit and sufficient tax liability to extinguish it, a single taxpayer with two qualifying children under age 17 and AGI of $80,400 would be able to take a credit of $700 for each child, or $1,400 total, calculated as follows: $80,400 AGI - $75,000 threshold level = $5,400/$1,000 per increment = 5.4 increments above the threshold level but any fraction of an increment is rounded up making 6 increments in this case; 6 increments x 5% = 30%; $1,000 - (30% x $1,000) = $1,000 - $300 = $700 credit per child x 2 children = $1,400.
A child qualifies for the child tax credit if he or she meets all the following requirements:
- The child is under age 17 at the end of the tax year;
- The child is (1) a descendant of either the taxpayer or taxpayer’s child (i.e., the child in question is taxpayer’s grandchild), (2) the taxpayer’s sibling, half-sibling, or step-sibling (for example, taxpayer’s brother or sister-in-law), (3) a descendant of taxpayer’s sibling, half-sibling, or step-sibling (e.g., the child is a niece or nephew of taxpayer), (4) taxpayer’s stepchild, or (5) taxpayer’s legally adopted child or foster child placed with the taxpayer by an authorized adoption agency or by judgment or decree of a court with jurisdiction;
- The child has the same principal place of abode as the taxpayer for more than one-half of the year;
- The child doesn’t provide over 50% of his or her support for the year; and
- The child is a U.S. citizen or resident alien.
For a more comprehensive definition of qualifying child, click on child tax benefit.
In cases where the child tax credit is refundable, it is labeled as Additional Child Tax Credit (pdf file) and available to taxpayers with at least one qualifying child but without sufficient tax liability to extinguish the regular child tax credit. The refundable portion of the child tax credit is 15% of earned income (plus tax-free combat pay, if any) in excess of $11,750 reduced by the amount of regular child credit. Click on 2007 child tax credit for instructions on how to calculate and claim the regular and additional child tax credits.
Example 2: Modifying Example 1 above, assume the single taxpayer doesn’t have sufficient tax liability to consume the regular child tax credit, say, a regular tax liability of $1,000 (but no AMT liability). He would be eligible for a refundable credit or additional child tax credit calculated as follows: (1) after reducing regular tax liability to zero, the taxpayer is left with a $400 child tax credit ($1,400 regular child tax credit - $1,000 tax liability); (2) comparing the 15%-of-earned income-over-$11,750 test amount or $10,298 ([$80,400 - $11,750] x 0.15) with $400 in step one and choosing the smaller, we discover the taxpayer is eligible for a refundable credit of $400 (remember our taxpayer is subject to phase out of the child tax credit since his AGI exceeds $75,000 thereby reducing the maximum credit per child from $1,000 to $700). Final tally for our single taxpayer: $1,000 regular child tax credit + $400 additional (refundable) child tax credit = $1,400. This example also illustrates the rule that any portion of the child tax credit that is phased out is lost and not recoverable by means of the additional child tax credit.
For taxpayers with three or more qualifying children, the additional child tax credit is the greater of (1) the result of the process outlined in Example 2 above for one or more qualifying children, that is, the smaller of the remaining child tax credit or 15% of earned income over $11,750 or (2) the excess of the taxpayer’s employee share of Social Security (FICA) taxes paid (including, if applicable, one-half of self-employed tax liability) over the earned income tax credit, where this excess amount is limited to the child tax credit remaining after reducing regular and alternative tax liability to zero. In effect, the test for three or more children brings the difference between Social Security taxes paid and the earned income credit into the equation.
More information on the child tax credit is contained in the relevant articles listed below:
Many happy returns, Roger
Comments
Leave a Reply
You must be logged in to post a comment.