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All About Child Tax Credits

Update: On December 22, 2017 President Trump signed the GOP’s sweeping tax bill into law. Under the new tax code, the child tax credit increased from $1,000 to $2,000. This applies to tax year 2018 (the tax return you will file by April 2019). In addition, more families will be able to claim the child tax credit, because income qualifications increased dramatically. Furthermore, the plan adds a $300 credit for each non-child dependent or parent for five years. Trump’s tax plan may well affect your child tax credit, so it’s important to educate yourself about the rules of the child tax credit and how they’ve changed.

Depending on your income, you may be eligible for a child tax credit of up to $2,000 for the 2018 tax year. Remember that unlike a tax deduction, a tax credit is a dollar-for-dollar reduction on your tax bill. Sound good? Here’s what you need to know about the child tax credit, from the eligibility requirements to how to claim it. For starters, you need to be the parent or guardian of a minor child.

What Is the Child Tax Credit?

Child tax credits are designed to give an income boost to the parents or guardians of dependent children. How much is the child tax credit? That depends on your income. The child tax credit lets you reduce your federal income tax bill by up to $2,000 for each qualifying child under the age of 17 that you claim as a dependent.

The child tax credit is just that – a tax credit. It’s not a deduction. Because it’s a tax credit, it directly reduces the amount you owe the IRS. So, if your tax liability is $3,000 but you’re eligible for, say, $800 of child tax credit, you now owe $2,200.

You should also understand the difference between refundable and non-refundable tax credits. A nonrefundable credit can cut your bill down to zero. But if the actual math ends up edging into the negative, you won’t get the difference back.

So let’s say your tax bill stands at $4,000. You qualify for $4,500 in non-refundable tax credits. You now owe no money to the IRS, but the agency won’t give you a $500 refund. If these were refundable tax credits you were claiming, you would get those $500.

The new tax law turns the child tax credit into a sort-of-hybrid. We’ll explain.

Is the Child Tax Credit Refundable?

Under the Tax Cuts and Jobs Act, up to $1,400 of the child tax credit is refundable. Beforehand, the child tax credit was entirely non-refundable. So if your tax bill when you file in 2019 is zero, you may get a $1,400 refund for every eligible child. Plus, this amount gets indexed for inflation in the upcoming years.

However, the new tax law caps the refundable portion of the child tax credit to 15% of your earned income that exceeds $4,500.

Nonetheless, the Trump Tax Plan effectively expanded eligibility for the child tax credit.

Child Tax Credit Eligibility

Eligibility for the child tax credit hinges on a few factors. One of them, of course, is whether you are the parent or guardian of minor children. The child you claim as your dependent has to meet six IRS tests:

  1. Age Test: The child you claim as your dependent must have been under age 17 (so, 16 or younger) at the end of the tax year (2018 if you’re filing in 2019).
  2. Relationship Test:  The child must be your daughter, son, foster child or adopted child. The child can also be a grandchild or a descendant of one of your siblings.
  3. Support Test: The child must not have provided more than half of their own “support,” meaning the money they use for living expenses.
  4. Dependent Test: The child must be claimed as your dependent on your federal income tax return.
  5. Citizenship Test: The child must be a U.S. citizen, a U.S. national or a U.S. resident alien.
  6. Resident Test: The child must have lived with you for more than half of the tax year (with a few exceptions detailed on the Child Tax Credit worksheet).

In addition to these six tests, income is also an eligibility factor.

Eligibility for the child tax credit isn’t all-or-nothing. There’s such a thing as the child tax credit income phase-out. As your adjusted gross income (AGI) increases, the child tax credit begins to phase out until you make too much money to claim it at all. So, after you breach a certain income threshold (the phase-out level), you’re eligible for less of the full credit until you can’t claim any of it.

However, the Trump Tax Plan raised these phase-out thresholds dramatically, effectively giving more families the opportunity to claim the child tax credit.

For tax year 2018, the phase-out begins at $200,000 AGI for those filing single (the previous phase-out started at $75,000).

Below, we explain where the new phase-out levels begin depending on your filing status. So the phase-out kicks in when you make a penny above the following:

  • Single, head of household, or married filing separately: $200,000
  • Married filing jointly: $400,000

But as we mentioned, your income can reach a point where you can’t claim the child tax credit. After all, this credit was designed to help low-to-moderate income families. Below, we explain where the credit vanishes based on your filing status.

  • Single, head of household, married filing separately: $240,000
  • Married filing jointly: $440,000

Claiming the Child Tax Credit

All About Child Tax Credits

Eligible filers will claim the child tax credit on Form 1040, Form 1040A, or Form 1040NR. Unfortunately for those who like the simplified versions of the tax form (Form 1040NR-EZ or Form 1040EZ), you can’t claim the child tax credit on those worksheets.

The IRS has yet to release the full Form 1040 for the 2018 tax year, but it has published a 1040 draft.

The Additional Child Tax Credit

Before the new tax law made part of the child tax credit refundable, some families were eligible for what’s known as the additional child tax credit. This effectively gave them a refund if the child tax credit reduced their tax bill to less than zero. It’s detailed on Form 1040. But as we indicated, the IRS has only a draft for the 2018 version available.

The Child and Dependent Care Tax Credit (CDCTC)

The child tax credit and the childcare tax credit are two different things. The child tax credit can only be claimed by the parents or guardians of minor children. On the other hand, the child and dependent care tax credit can also be used by those who are paying others to care for aging parents or disabled relatives. It’s typically claimed by parents paying people to care for dependents as they venture back into the work force.

With the child and dependent care tax credit, you can’t claim more than $3,000 of care expenses for one child/dependent younger than 12, or an incapacitated spouse or parent. If you have two or more children/dependents, you can’t claim more than $6,000 of care expenses. Technically, there’s no income phase out if you’re trying to claim the CDCTC, but the credit can only equal up to 35% of qualifying care expenses (depending on your AGI).

This nonrefundable credit reduces as your income increases, but doesn’t entirely erode.

What counts as a care expense? According to the IRS rules on the CDCT, “If you paid someone to care for your child, spouse, or dependent last year, you may be able to claim the child and dependent care credit.” You must have secured a caregiver whom you paid so that you or your husband or wife (if filing jointly) could go to work or hunt for a job. To claim the federal credit, fill out IRS Form 2441.

State Child Tax Credits

Some states offer a complementary state-level child tax credit and/or CDCTC that matches part or all of the federal credit. In some states, the credits are refundable and in other states they are not. Check out this map for state-by-state details.

The Takeaway

All About Child Tax Credits

The IRS offers child tax credits to help parents and guardians offset some of the costs of raising a family. Some people who are eligible for these child tax credits never claim them, however. If you’re eligible, don’t leave money on the table. You could be reducing or eliminating your tax bill, or earning a bigger refund. Who doesn’t want that?

For further help reducing your tax bill, consider working with a financial advisor who specializes in taxes to craft a financial plan. Having a financial plan can be key to ensuring you’re taking everything in account come tax season. Our SmartAsset financial advisor matching tool can help you find a person to work with to meet your needs. First, you answer a series of questions about your situation and your goals. Then, the program narrows down thousands of advisors to three fiduciaries who meet your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while doing much of the hard work for you.

Tips for Saving Money on Your Taxes

  • The child tax credit is just one way to reduce your income tax bill. If you need help finding other credits or deductions that you qualify for, a tax filing software may be able to help you. SmartAsset looked through common tax filing services to find the best online tax software for your specific situation.
  • Some savings options, like a health savings account or 401(k), allow you to contribute pre-tax money. These options minimize your taxable income, potentially dropping you into a lower tax bracket, which may have already been simplified by the Trump tax plan.

Photo credit: ©iStock.com/Christopher Futcher, ©iStock.com/gruizza, ©iStock.com/DragonImages

Amelia Josephson Amelia Josephson is a writer passionate about covering financial literacy topics. Her areas of expertise include retirement and home buying. Amelia's work has appeared across the web, including on AOL, CBS News and The Simple Dollar. She holds degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.
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