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Child Tax Credit

Child Tax Credit

...a child tax credit reduces the amount of tax for the year...

TurboTax and

If you have children who are under age 17 as of the end of the tax year, you can get a $1,000 tax credit per child on your tax return. A tax credit reduces your tax bill dollar for dollar, so three qualifying children, for example, can cut what you owe Uncle Sam by $3,000. The credit may be limited if your income exceeds the levels listed below.

And the credit does not affect the exemptions you take for dependents. The credit is in addition to your exemptions.

To Claim the Credit

You must meet these tests to qualify for the credit:

  • -The dependent must be a U.S. citizen or resident. You can claim your child, stepchild, adopted child, grandchild or great-grandchild. Under a new definition of a “qualified child,” you can also claim the credit for siblings, step-siblings and half-siblings that live with you. Foster children qualify if they were placed with you by a court or authorized agency. To claim the credit, children must live with you more than half the year and must not provide more than half of their own support.
  • -You must report each qualifying child’s tax identification number (TIN) (usually the child’s Social Security number) on your return.

Calculate your child tax credit using the worksheet provided in the instructions for 2007 Form 1040, line 53, or Form 1040A, line 33.

Tip: Because a child tax credit reduces the amount of tax for the year, it may also reduce the amount that needs to be withheld from your paychecks. If you get a substantial refund, review the W-4 form on file with your employer. That’s the form that controls how much income tax is withheld from your wages. You may need to revise it to reflect the tax savings you receive through the child tax credit.

How Much You Get

In most cases, the child tax credit is nonrefundable, meaning if your credit is bigger than your tax liability, your tax bill is just reduced to zero, and the rest of the credit is lost.

In certain cases, though, you can get a child tax credit refund when the credit exceeds your tax liability. This means that you would get a check for the difference between your tax credit and what you owe in taxes. This refundable child tax credit is called the Additional Child Tax Credit, which you calculate on Form 8812.

The formula is fairly complicated and a good reason to use tax-preparation software like TurboTax. If you have one or more qualifying children and more than $11,750 of earned income in 2007, you may be entitled to a refund of up to 15 percent of your taxable earned income (including tax-free combat pay) that exceeds $11,750. Or, if your earned income is less than $11,750, you may be eligible for a refundable credit if you have three or more qualifying children and you paid Social Security taxes that exceeded your earned income credit. Follow the instructions on Form 8812. In 2008, the income limit for the refundable child credit increases to $12,050.

The child tax credit is reduced or eliminated if your adjusted gross income is above certain thresholds. The amount of the credit is reduced by $50 for each $1,000 (or fraction thereof) by which the taxpayer’s modified adjusted gross income exceeds the threshold amount. The threshold amount is:

  • -$110,000 in the case of a joint return
  • -$75,000 in the case of an unmarried individual
  • -$55,000 in the case of a married individual filing a separate return

For example, Herb and Susan have two children under 17. The couple filed a joint return and reported income of $50,000 in 2007. Their AGI is well below the $110,000 phase-out threshold for married couples filing jointly. They may claim the full $2,000 child credit since the credit does not exceed their tax liability. Sam and Judy also have two children under 17, but their joint income is $130,000, meaning they will lose some of their child tax credit. Since their combined income exceeds the $110,000 phase-out threshold for married couples by $20,000, they must reduce their credit by $50 for every $1,000 (or fraction thereof) over the limit. So they would lose $1,000 of their credit ($50 × 20) and could claim only a $1,000 child tax credit. Note that the credit is reduced by a total of $50 for each $1,000 your income exceeds the threshold, not by $50 for each child for whom you claim the credit.

If you pay the Alternative Minimum Tax, you can use the child tax credit to offset that.

Something to keep in mind: the child tax credit rate of $1,000 per child is now scheduled to disappear after 2010, but there’s a good chance that Congress will extend it past that date or even make it permanent.

Back to “GovCentral’s Ultimate Tax Guide.”

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