Tax Center / Marriage & Family
The Child Tax Credit
By Roy Lewis
One of the changes enacted by the Taxpayer Relief Act of 1997 allows qualified taxpayers to claim a $500 tax credit for each qualifying child still under the age of 17 at the end of the tax year.
How It Works
If your modified adjusted gross income (AGI) is $110,000 or less (for married people filing a joint return), $75,000 (for single or head-of-household filers), or $55,000 (for married/filing separately filers), and you have a qualifying child in your household, you will be able to claim a $500 credit for this child.
For a child to be deemed "qualifying," the child must have a tax identification number (normally a Social Security number) and must be:
So, if your modified AGI is below the limits noted above, and you have a qualifying child, you will receive a $500 credit per qualifying child. Simple as that. No other computations will be required. No other forms to fill out. And, remember that this is a credit against your tax -- a direct dollar-for-dollar reduction of your actual tax liability. It is not a deduction (which is much less valuable).
- A dependent (or qualified for the dependency deduction)
- Related to the taxpayer (son, daughter, stepson, stepdaughter, or an eligible foster child)
- Under the age of 17 as of the end of the year. This means that if your child turns age 17 during the tax year, the child is not eligible for the child tax credit. This is true even if his or her 17th birthday falls on December 31. If the child is age 17 anytime during the year, he or she is not qualified for the credit.
- A citizen, national, or resident of the U.S.
Example: Jack and Jill have modified AGI of $65,000. They also have three qualifying children. When they compute their taxes, they determine that their total tax liability (before any credits) amounts to $7,200. From this tax liability, they take their child credit in the amount of $1,500 ($500 per child). Their net tax liability is now just $5,700. They also have federal withholding of $7,500. When they apply their withholding against their net tax liability, they'll receive a federal refund of $1,800. For Jack and Jill, the child credit reduced their tax liability by approximately 20%. That's a pretty big reduction.
The Phase-Out Rules
As with most tax laws, it wouldn't be any fun without some complex issues. The first issue for this law is the phase-out of the modified AGI. If your modified AGI is below the levels noted above (also called the "threshold amounts"), you don't have any problems. But, what if your income is greater than the levels noted? Do you simply lose the credit entirely? Not exactly.
The amount of the total credit you can take is reduced $50 for each $1,000 (or fraction thereof) of modified AGI exceeding the threshold amounts. Some simple math will tell you that if your are a head-of-household filer with one qualifying child, your full $500 child credit will be received when your modified AGI is $75,000 or less, and will be completely phased out when your modified AGI is more than $85,000. If you are in the "phase-out" range, the IRS provides worksheets in the instructions to Form 1040 that you will use to compute your partial credit.
Example #1: Mary files as head of household and she has one qualifying child. Mary's modified AGI is $74,000. Mary will receive the entire $500 credit.
Example #2: Same facts as above, but assume that Mary's modified AGI is $90,000. Mary will not receive any child credit. Her AGI exceeded the threshold amount by $15,000. Therefore, Mary's child credit must be reduced (but not below zero) by $50 for each $1,000 of AGI over the threshold amount. Mary's income is $15,000 over the threshold amount. To compute how much to reduce the credit, divide the $15,000 by $1,000. That equals 15. Multiply 15 by $50 to get $750. Since the credit is only $500, Mary will lose the entire credit.
Example #3: Same facts as above, but assume that Mary's modified AGI is $78,000. Mary's AGI exceeds the threshold amount by $3,000. She'll have to reduce her credit by $150 ($3,000 divided by 1,000 is 3; 3 multiplied by $50 is $150). Mary's credit will be $350 ($500 less $150).
But, note that the amount of the credit is based on the number of qualifying children, while the phase-out is based on the total dollar amount of the credit. So, the more children you have, the greater your phase-out range. Bottom line: If you have more qualifying kids, you'll also have a larger phase-out range. By way of explanation, let's look at Mary's example #2 again, but add another qualifying child.
Example: Mary, filing head of household, has two qualifying children and a modified AGI of $90,000. Mary is still $15,000 over the threshold, and will still be required to reduce her child credit by the $750 computed above. But, since Mary now has two children, she will start with a base credit of $1,000 (2 X $500 credit for each child) and will still receive the benefit of a $250 child credit ($1,000 minus the $750 reduction). In effect, if Mary has one child, her phase-out range is from $75,000 to $85,000. But, if Mary has two children, her phase-out range is from $75,000 to $95,000. And if Mary has three children, her phase-out range is from $75,000 to $105,000. And so on, and so on, and so on. And the computations work exactly the same for each filing status.
Remember that the child credit rules do not take the place of any other credits for which you may otherwise qualify -- such as the earned income credit or the dependent care (i.e., child care) credit.
But, the rules get even more complex when you have more child credits than you have income tax liability. If you have one or two children and your child tax credit exceeds your tax liability, then your credit can be used to reduce your tax liability to zero, but the rest of the credit is simply lost. It can't be carried forward or carried back.
Example: John and June have two qualifying children. Their tax liability before taking the child tax credit amounts to $700. Their child tax credit amounts to $1,000. As we pointed out above, the child credit is nonrefundable in most instances. This is one of those cases. John and June will be able to reduce their tax liability to zero by using $700 of the child credits. The remaining $300 of "unused" credit is lost forever. It can't be applied to any past or future tax year.
As if that wasn't complex enough... there's an exception. If you have three or more children and your credit exceeds your tax liability, you could qualify for an additional child tax credit, which might allow you to use your entire credit and make part of the credit refundable.
How do you do this? You complete IRS Form 8812 to compute your additional child tax credit. You are able to use the expanded credit against any Social Security and/or self-employment taxes you paid during the year. If you are in this situation, you must review IRS Form 8812 and the associated instructions to understand the computations.
It's not easy, and can be a bit confusing, but, the impact of the credit may be well worth the work. And the additional child tax credit does interact with the earned income credit, making computations even more difficult.
Many of you will find that this credit generates a very large federal tax refund. While this might make you happy for a short period of time, it's not a good practice. Think about it. It's never a good idea to have Uncle Sammy hold on to your money all year long. Sammy doesn't pay you any interest on those big federal tax refunds. If you are receiving a hefty refund, you might want to consider revising your federal withholding form for the remainder of the year now. If you anticipate a large refund come tax time next year due to the child tax credit, change your W-4 form now and get that extra cash in your pocket right away.
The payroll department at your place of employment will be able to supply you with a W-4 form and instructions that you can use to revise your federal withholding. Make sure that you get the full W-4 form, the one with the worksheets, so you can make the proper computations. If your employer doesn't have the full W-4 form, you can download it from the IRS website.