The Child Tax Credit was enacted in 1997 as a $400-per-child tax credit to help families support their growing families. The child tax credit has since been expanded to a maximum of $1,000 per child. The amount of the credit depends on the taxpayer's income and a number of other factors. In addition, if a taxpayer's child tax credit is below $1,000, there is an additional child tax credit to boost the amount closer to $1,000.
Let's review the difference between tax credits and tax deductions, refundable and nonrefundable tax credits, how the child tax credit is calculated, how the additional child tax credit is calculated, and who is eligible for the credit.
Tax credits versus tax deductions
A tax credit allows you to subtract the amount of the credit directly from your taxes due. Tax deductions, on the other hand, typically allow you to subtract the amount of the deduction from your taxable income.
Let's look at an example. Say you are married filing jointly and had $95,000 in total income; based on the 2014 tax brackets, the standard deduction, and two personal exemptions, you would owe a little over $10,500 in taxes. A $10,000 tax credit would cancel out all but $500 of your taxes owed. On the other hand, a $10,000 tax deduction would drop your taxable income to $85,000, ultimately reducing your taxes owed by a smaller amount. Given the numbers above, you would still owe $8,861 in taxes after a $10,000 tax deduction.
Refundable credit versus nonrefundable tax credit
There are two types of tax credits: refundable and nonrefundable. You can get money back for a refundable tax credit even if you didn't earn any income or pay any taxes. A nonrefundable tax credit only provides a refund for the amount of taxes paid.
Let's say you owe $2,000 in taxes from income during the year, and at the end of the year, you claim a $2,500 tax credit. If the tax credit is refundable, you'll get $500 back from the government. If the tax credit is nonrefundable, then it is deducted from the taxes you owe -- so in this example, you don't owe the government anything, but you can only zero out your taxes, meaning you miss out on the remaining $500 of the tax credit.
Child tax credit (nonrefundable)
The child tax credit is worth up to $1,000 per qualifying child, depending on your income. In order to qualify, a child:
- Must be under the age 17.
- Must be either your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of these individuals, which includes your grandchild, niece, or nephew. An adopted child is always treated as your own child.
- Must not have provided more than half their own financial support.
- Must be claimed as a dependent on your tax return.
- Must be a U.S. citizen, U.S. national, or U.S. resident alien.
- Must have lived with you for at least half the year, except under some special cases.
The child tax credit is affected by your modified adjusted gross income if it is above a certain threshold. For individual taxpayers, that threshold is $75,000, for those married filing jointly it is $110,000, and for those married filing separately the level is $55,000.
For every $1,000 your income is over the limit, your child tax credit declines by $50. This decline is not per child, so if you have three kids and earn $1,000 more than the limit, your child tax credit will only decline by $50, not $150.
The credit can also be reduced if you claim other credits, such as the Mortgage Interest Credit or the Residential Energy Efficiency Credit. You can go through the calculations here.
Additional child tax credit (refundable)
If your Child Tax Credit is reduced, you could qualify for the Additional Child Tax Credit, particularly if you and/or your spouse are in the armed services. The calculations for the Additional Child Tax Credit are complicated but work out so that you might claim a refundable tax credit of up to 15% of your earned income.
More ways to reduce your taxes
Growing families keep the economy humming along, and the government tries to help them by reducing their tax burden. Uncle Sam provides numerous ways to lower your taxes -- you just have to know what rules you can take advantage of depending on your own situation