Tax Planning & Preparation Blog

Everything You Always Wanted to Know About the Child Tax Credit but Were Afraid to Ask

What is it?

The child tax credit is a credit of up to $1,000 per qualifying child under age 17.  Remember that a credit directly reduces your tax due. 

So, who is a qualifying child?

A qualifying child is someone who meets the seven tests of age, relationship, support, dependent, joint return, citizenship and residence.  The seven ‘wonders of the world’ of a qualifying child sounds ominous, but is simple and most taxpayers with children will meet these tests.  Basically, the qualifying child must be age 16 or younger at the end of 2011.  To pass the relationship test, the child must be your son, daughter, stepchild, foster child, brother, sister, stepbrother, step sister or descendant of any of these individuals, which would include your grandchild, niece or nephew. (An adopted child is always treated as your own child.)  The support test refers to the support you provide for this child – the child must not have provided more than half of his or her own support and you must claim the child as a dependent on your federal tax return.  Along with this, the qualifying child cannot file a joint return for the year and the child must be a U.S. citizen, U.S. national, or U.S. resident alien.  Finally, the child must have lived with you for more than half of 2011. 

As with all good credits, there are income limitations.  For married filing joint taxpayers, the phase-out begins at $110,000 ($55,000 for married filing separately) for one child and maxes out at $209,001 for five children.  For all other taxpayers, the phase-out begins at $75,000 for one child and maxes out at $174,001 for five children.  The child tax credit is limited by the amount of income tax and any alternative minimum tax you owe.  In simple terms, this credit is non-refundable.  However, there is a bonus called the Additional Child Tax Credit, which is partially refundable and available to taxpayers with earned income in excess of $3,000.  The additional child tax credit is the smaller of the tax credit remaining after reducing regular tax and AMT to zero and 15% of the taxpayer’s earned income in excess of $3,000.  Therefore, the Additional Child Tax Credit is generally available to lower income taxpayers.  

Wondering if you qualify for either of these credits? Post a comment below or contact our Tax Planning & Preparation Group at 440-449-6800. 

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