Child Tax Credits
If you have children you support, there are two different tax credits you should know about.
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Children are expensive. To offset some of this expense, Congress provides two special tax credits to people who support children:
- a child tax credit of $1,000 per child, and
- a child and dependent care tax credit of up to $6,000.
If you qualify, you can get both credits in the same year, and you can still get the tax exemption for children and other dependents. These credits, however, are subject to limitations that can reduce or eliminate the benefit, depending on your circumstances.
Child Tax Credit
The child tax credit is only available if you have what the IRS calls a “qualifying child.” A qualifying child is a child for whom you can claim a dependency exemption. A qualifying child can be your son, daughter, stepchild, adopted child, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them—for example, your grandchild, niece, or nephew. A qualifying child must:
- live with you for over half the year,
- provide less than half of his or her own support, and
- be a U.S. citizen, resident, or national.
The child tax credit may be claimed only if you have a qualifying child under age 17 at the end of the year. You get no credit if a child turned 18 during the year.
The IRS has an online questionnaire you can complete to determine if you have a qualifying child. Visit the Is My Child a Qualifying Child for the Child Tax Credit? page at the IRS website.
Before you get too excited about how much money Junior is going to save you on your taxes, read on. The child tax credit was created for low and middle income taxpayers. It is subject to an income threshold and the amount of credit you can take each year goes down as your income approaches that threshold amount. Here’s how it works.
Everyone with a qualifying child starts out the tax year entitled to a $1,000 credit per child for the tax year. This credit is gradually phased out for taxpayers whose incomes rise up to and above the annual threshold amount specified for the year. Specifically, for each $1,000 that your modified adjusted gross income exceeds the income threshold level, the total child tax credit for a family (not the amount per child) is reduced by $50. If you make too much money, you won’t get any credit at all.
The child tax credit starts to be reduced when income reaches the following levels:
- $55,000 for married couples filing separately,
- $75,000 for single, head of household, and qualifying widow(er) filers, and
- $110,000 for married couples filing jointly.
For example, a married couple filing jointly with one qualifying child gets no child tax credit if their adjusted gross income exceeds $130,000. The $1,000 credit they started the tax year with would be whittled down to zero by 20 $50 reductions.
The child tax credit is not refundable—that is, you may take it only up to the amount of your tax liability for the year. For example, if you qualify for a $3,000 credit, but owe only $2,000 in income taxes for the year, you will only get a $2,000 credit. However, if you can’t claim your full child tax credit because of this limitation, you may be able to obtain a refund for the balance in the form of an additional child tax credit. This amount of this credit is equal to 15% of your earned income over $3,000. See IRS Schedule 8812 for details.
Child and Dependent Care Tax Credit
Unlike the child tax credit (which you get simply by having a qualifying child), you can use the child and dependent care credit only if you spend money for child care so that you and your spouse, if any, can work. There is no income ceiling on the child and dependent care credit (which is also different from the child tax credit). People with higher incomes get a smaller credit than those with more modest incomes. Here’s how it works.
You qualify for the credit if:
- you have a qualifying child or other dependent under the age of 13, or your spouse is disabled and physically or mentally incapable of caring for him or herself, or you have any disabled dependent who has an has income of less than $4,000 per year
- you incur child care expenses to enable you and your spouse, if any, to earn income
- you and your spouse file a joint tax return (applicable only if you’re married), and
- you and your spouse, if any, both work either full or part-time and have earned income for the year, unless you or your spouse is a full-time student or disabled. (Looking for work counts as being employed.)
The amount of the credit is based on a percentage of the child care expenses you incur on the days that you and/or your spouse work. The percentage ranges from 20% to 35% of expenses, depending on your income. Taxpayers with an adjusted gross income (AGI) of over $43,000 use the 20% amount. Those with an AGI under $15,000 use the 35% amount. Those with AGIs between $15,000 and $43,000 use a percentage based on a sliding scale. However, there is an annual ceiling on the amount of child care expenses that can be taken into account for the credit. The ceilings are $3,000 for one qualifying child and $6,000 for two or more.
If you’re fortunate enough to have an employer that reimburses you for child care expenses, you must deduct the reimbursed amount from your annual child care expenses.
Like the child tax credit, the child and dependent care credit is nonrefundable--that is, it is limited to the amount of your tax liability for the year.
Obviously, you need to keep track of everything you spend on child care during the year and be sure to keep receipts and cancelled checks. Child care expenses include expenses both in and outside your home, such as:
- day care
- nursery school, and
- day camp (but not if the child sleeps overnight at the camp).
The costs of sending a child to school in the first grade or beyond are not included. Nor can you hire your spouse, child, or other dependent as a day-care provider. If your child turns 13 during the year, you can only include those expenses you incur before his or her 13th birthday.
To claim the credit, you’ll have to list on your tax return the name, address, and Social Security number or Employer Identification number of the people you pay for dependent care, so be sure to get this information. You must also file IRS Form 2441, Child and Dependent Care Expenses with your tax return.
The IRS has an online questionnaire you can complete to determine if you qualify for the child and dependent care credit. Visit the Am I Eligible to Claim the Child and Dependent Care Credit? page at the IRS website.