Take the Earned Income Tax Credit, for example. This credit phases out for married couples with earnings of more than $21,370 to $55,952, depending on the number of qualifying children they have. Similarly, the American Opportunity Tax Credit phases out for single filers earning more than $90,000 and joint filers earning $180,000.
But thankfully, a few credits are still on the table for higher earners, one of which is the Child Tax Credit. If you have children, it pays to see if you're entitled to claim it -- even if your earnings are on the more generous side.
How tax credits work
A tax credit is a dollar-for-dollar reduction of your tax liability. Tax deductions, by contrast, exempt some of your earnings from taxes, and while they're certainly helpful, their value is largely a function of the tax rate you're subject to. For example, if you're entitled to a $2,000 tax deduction and your tax rate is 24%, that deduction saves you $480 on your taxes. A $2,000 credit, however, actually saves you $2,000 on your taxes.
Most tax credits are nonrefundable, so the most they can do is reduce your tax liability to $0. Some credits are refundable, though, and those will pay you something even if you owe the IRS nothing and have money left over. The Child Tax Credit happens to be partially refundable, making it all the more lucrative.
How the Child Tax Credit works
The Child Tax Credit is worth up to $2,000 per child in your household under the age of 17. You'll get that full $2,000 if your income doesn't exceed $200,000 as a single tax filer, head of household, or married couple filing separately. If you're a married couple filing jointly, you can claim the full credit if your income doesn't exceed $400,000.
From there, the credit begins to phase out to the tune of $50 for every $1,000 in income. In other words, if you're married filing jointly with an income of $405,000, you lose $250 of the credit.
That also means that if your income exceeds $240,000 as a single tax filer, head of household, or married couple filing separately, or $440,000 as a married couple filing jointly, then you won't be eligible for the Child Tax Credit at all. But otherwise, you can earn a substantial amount of money and still collect all or some of the credit.
Furthermore, up to $1,400 of the Child Tax Credit is refundable. This means that if you owe the IRS no money and are then able to claim the Child Tax Credit for one child, you won't get the full $2,000, but you'll get $1,400 in refund form.
A nice tax break for the well-off
It's often said that the tax code favors the wealthy, but in many cases, higher earners don't get to benefit from the tax breaks lower earners are entitled to. If you fall into the trap of not being among the ultra-wealthy (in other words, you're not a millionaire), but you're fairly well off, the Child Tax Credit could be a nice way to score some tax savings this year.