Do you have children or any other dependents in your household? Then the chances are you’ll be eligible to claim the Child Tax Credit.
For the new tax year, this credit is worth up to $2,000. If you qualify, it will reduce your overall income tax bill due to the Federal government.
You may have already claimed this credit in the past, but for this year there are some major changes as a result of the tax overhaul initiated at the end of 2017 by the Trump administration. Taxpayers must be aware of these eligibility rules, so they don’t incorrectly claim the credit or miss out on what they deserve.
What is the Child Tax Credit?
The idea behind the Child Tax Credit (CTC) is to help parents and guardians by giving them an extra boost to their income. This tax credit is for any child who’s under the age of 17 and is worth $2,000. However, the amount you can get is determined by how much you earn.
This is a credit aimed at working parents, so you must have a minimum of $2,500 in earned income in order to qualify. For single filers, the credit begins to phase out at $200,000. For joint filers they will see the credit phase out at $400,000.
Remember, these tax credits reduce the amount you owe on your Federal tax credits.
If you owe $5,000 to the Federal government at the end of the tax year and you qualify for $4,000 in tax credits because you have two children, you would only need to pay $1,000 this tax year.
To make things even better for parents, these tax credits are refundable up to a maximum of $1,400. So if you owe nothing, you could get up to $1,400 paid directly to you.
What has Changed for Taxpayers?
President Donald Trump confirmed his flagship tax overhaul in 2017 known as the Tax Cuts and Jobs Act (TCJA), which has now come into force for the upcoming tax year. This brought a number of changes to the US tax code. Some of these changes also impacted the CTC.
Here are some of the big changes you need to take into account.
- The credit for each child was doubled to $2,000.
- Part of the CTC ($1,400) is now refundable. The credit wasn’t refundable before.
- All children must possess a Social Security Number.
- Parents must have an earned income of at least $2,500.
- The phase-out threshold was increased from $75,000 to $200,000 for single filers and from $110,000 to $400,000 for those filing jointly.
- Non-child dependents are now worth $500 in tax credits. These are not refundable.
The other big alteration was the TCJA removed the Additional Child Care Tax Credit and combined it with the current version of the CTC. That was the reasoning behind increasing the CTC limits and making it partially refundable.
Which Dependents Can You Claim the CTC on?
There are a range of tests to determine whether a dependent can be claimed as part of the CTC. The IRS uses six tests to decide if someone counts as a dependent.
Test One – The child must be under the age of 17 by the conclusion of the current tax year.
Test Two – The child must be a direct descendant, stepchild, half sibling, sibling, or an adopted child. The child can also be the direct descendant of any of the above, which includes grandchildren and nephews.
Test Three – The child can’t provide half of their own financial support, which is the money used for their living expenses. They also can’t file a joint return if you’re claiming them as a dependent.
Test Four – Taxpayers must claim the child as a dependent on their tax returns.
Test Five – Are they a citizen or resident alien of the US? They must also possess a Social Security Number when claimed as a dependent.
Test Six – The child must live with the taxpayer claiming them as a dependent for half of the tax year in question.
If the dependent passes all of these tests, you can claim them as a dependent and they’re eligible for the CTC.
Income Limits for the CTC
There are income limits that apply to everyone attempting to claim the CTC. For a start, anyone claiming the credit must have an earned income of $2,500 or more for the current tax year. The credit also phases out as your Adjusted Gross Income (AGI) goes up.
So when you cross a certain income threshold the credit begins to phase out and you can only claim part of the credit. The TCJA, however, ensured that most Americans will be able to claim the full credit.
For the new tax year, the CTC begins to phase out at the $200,000 income limit for single filers and $400,000 for joint filers. The credit disappears completely for single filers at $240,000 and $440,000 for those filing jointly.
How to Claim the CTC
When you prepare your taxes online you are automatically asked the right questions to determine if you qualify and how much you get back in taxes for a child.
The CTC is claimed through Form 1040, via line 12a. If you’re filing Form 1040NR, you’ll find the CTC on line 49.
Try the Dependents Tax Credit Calculator
The Dependents Tax Credit Calculator will give you an accurate view of how much you could be entitled to. Just answer some simple questions regarding your income and your living circumstances and you’ll get a readout on how much you may be eligible for.
The IRS also offers a child tax credit worksheet on its website for anyone who needs to work out how much the CTC is worth to them for this tax year.
If you want to claim the CTC for previous years, this can be done through Forms 1040, 1040A, and 1040NR.
How Much of the CTC Can Be Refunded?
The CTC has become a refundable tax credit for the first time. It’s now possible to claim $1,400 of the total $2,000 tax credit as a refund. So if your bill from the Federal government is $0 you can potentially receive a $1,400 refund for every dependent who qualifies.
The $1,400 refund limit will increase every year as it’s indexed to the current inflation rate.
But the TCJA has also capped the amount of the CTC that’s refundable to your earned income. The refundable part of the CTC can’t be more than 15% of your total earned income. You would need an earned income of $11,830 to claim the full $1,400.
What Happened to the ACTC?
The ACTC was formerly used by taxpayers to claim what’s now the refund from the CTC. The CTC was used to reduce your Federal tax bill, with the ACTC offering the refund.
From the 2018 tax year onwards, the ACTC has been phased out. However, it can still be claimed through Form 1040 if you need to file for previous tax years.
Credit for Other Dependents (ODC)
The ODC is a brand-new credit you can claim if you have other dependents who don’t qualify for the CTC. This is worth $500 for each one.
The tests are mainly the same. You may claim the ODC for other dependents, such as a disabled adult or an elderly relative.
The Child and Dependent Care Tax Credit (CDCTC)
The Child and Dependent Care Tax Credit is often confused with the Child Tax Credit, but it’s not the same credit. You can take this credit if you had a minimum earned income amount for this tax year and you’re paying for the care costs of a dependent.
You can claim this credit if you’re a godparent, caring for elderly parents, or paying for the care of disabled relatives.
To qualify, dependents must be:
- 12 or under, in the case of children, when the tax year ends.
- An adult family member or spouse who isn’t able to cover their own care needs due to physical or mental disabilities. These dependents must have a gross income of $4,150 or less.
The CDCTC can be used to claim back qualified care expenses up to 35% of the total cost. The percentage you can deduct, again, depends on how much you earned during the tax year.
The credit can be applied to care expenses of $3,000 for a single dependent or $6,000 for more dependents. The biggest credit amount you can claim is $1,050 for a single dependent and $2,100 if you have more than one dependent.
This is not a refundable tax credit and must be used for expenses involving care while you work (or are looking for work) or household services.
The CDCTC doesn’t include child support.
Use Form 2441 if you’re eligible to claim this tax credit.
What about State Child Tax Credits?
Certain states also have the above credits at the state level. They usually partially match or fully match the Federal versions of these tax credits.
Depending on the state, they may also be refundable.
You should check out whether your state offers these credits and how much they’re worth.
What You Should Take from this Guide
The IRS provides help to parents and guardians when they want to raise a family. They also provide support to people who are caring for other dependents. Parents should be claiming the CTC because most Americans are now eligible for the full credit. For those with low tax bills, it’s possible to get a tax refund out of it.
To make sure you’re claiming these tax credits correctly, you should consider using online tax filing. That way everything can be taken into account and you can avoid overpaying the Federal government or leaving money on the table.
Do everything you can to reduce your tax bill by claiming credits and deductions. Try to take everything you’re eligible for. Many taxpayers make the mistake of failing to apply for every credit and deduction they’re eligible for.