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Child Tax Credit Explained

Posted By Jim On 03/16/2011 @ 7:10 am In Taxes | 19 Comments

One of the popular credits extended along with the Bush tax cuts and the tax brackets [3] was the child tax credit. The child tax credit is a nonrefundable $1,000 tax credit for every child under the age of 17, subject to eligibility for both the filer (income eligibility) and the child (age isn’t the only factor in determining eligibility).

For families, this tax credit is very popular because a $1,000 tax credit for someone in the 25% tax bracket is like getting a $4,000 deduction. If you’re in the 15% tax bracket, it’s like getting a $6,666 deduction – for each child.

What is a Child?

The rules on eligible children is pretty straightforward and what you’d expect:

  • Child must be your dependent and must be a U.S. citizen or resident. The definition of a dependent is pretty broad and includes siblings, half siblings, and others but they must live with you for at least half the year and you must provide at least half of their support (they can’t be claimed by someone else on their return).
  • The dependent must be under the age of 17 at the end of the year (so 16 and younger).

Income Eligibility

If your child satisfies the requirements of being a child, the next step is to determine whether you can claim it based on income limitations. Much like other credits, this one is reduced based on your modified adjusted gross income at a rate of $50 per $1,000 you are over the threshold.

If you are married filing jointly [4], the phase-out starts at $110,000. If you are a single filer, the phase-out starts at $75,000. Finally, if you’re married filing separately [5], the phase-out starts at $55,000. The top end of the phaseout will depend on how many children you have.

Example: If a married couple filing jointly has three kids, they have $3,000 in child tax credit. They can claim the entire amount if their MAGI is under $110,000. If they earned, $130,000 then they must reduce their total claim by $1,000 to $2,000. If they earned $150,000 then they must reduce their total claim by $2,000 to $1,000. Unlike other phaseouts, which have hard caps, this one is merely a reduction of the credit if your income exceeds the lower threshold.

Credit Refundability

In most cases, this is a non-refundable tax credit [6]. You can, however, qualify for the Additional Child Tax Credit [7] if you satisfy some conditions and that credit is refundable.

Finally, this credit is in addition to the personal exemption you can claim for your dependents. That exemption reduces your taxable income (for 2010) by $3,650 per person, which can rival the size of the credit depending on your tax bracket.

(Photo: emerycophoto [8])


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[2] Email: mailto:?subject=http://www.bargaineering.com/articles/child-tax-credit-explained.html

[3] tax brackets: http://www.bargaineering.com/articles/federal-income-irs-tax-brackets.html

[4] married filing jointly: http://www.bargaineering.com/articles/married-filing-jointly-married-filing-separately-filing-status.html

[5] married filing separately: http://www.bargaineering.com/articles/when-does-married-filing-separately-make-sense.html

[6] non-refundable tax credit: http://www.bargaineering.com/articles/refundable-tax-credits-vs-non-refundable-tax-credits.html

[7] Additional Child Tax Credit: http://www.irs.gov/pub/irs-pdf/f8812.pdf

[8] emerycophoto: http://www.flickr.com/photos/emerycophoto/3277184430/sizes/s/

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