Child Tax Credits

If you have children you support, there are two different tax credits you should know about.

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 up to $2,000 per child, and
  • a child and dependent care tax credit of $3,000 per child, up to $6,000 for two or more children.

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. In the past, the child tax credit was limited to middle and lower-income taxpayers. However, as a result of changes brought about by the Tax Cuts and Jobs Act, you can earn up to $400,000 and qualify for the full credit.

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 who qualifies as a dependent for tax purposes. 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
  • be a U.S. citizen, resident, or national, and
  • have a Social Security number which you must provide on your tax return.

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 17 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.

During 2018 through 2025, everyone with a qualifying child starts out the tax year entitled to a $2,000 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. However, the Tax Cuts and Jobs Act greatly increased the amount you can earn and still receive the credit. Indeed, only a small fraction of all taxpayers are unable to obtain the credit.

The child tax credit starts to be reduced only when your adjusted gross income reaches the following levels:

  • $400,000 for married couples filing separately, and
  • $200,000 for all other taxpayers.

For example, a married couple filing jointly with one qualifying child gets no child tax credit if their adjusted gross income exceeds $440,000. The $2,000 credit they started the tax year with would be whittled down to zero by 40 $50 reductions.

Starting in 2018, the child tax credit is partly refundable—that is, you may collect it even if you owe no taxes for the year. The maximum refundable amount is $1,400 per child. However, the actual refundable amount you can collect if you owe no tax for the year depends on your earned income (generally, wages, salary, tips, or net earnings from self-employment). The refundable amount is equal to 15% of your earned income over $2,500, up to the maximum $1,400 credit. For example, if your earned income is $10,000, your refundable credit would be 15% x ($10,000 - $2,500) = $1,125.

If you have three or more qualifying children and receive the earned income credit, you can use a different formula to figure your refundable credit. With this formula, your refundable credit is equal to the amount your Social Security taxes exceed your earned income credit. You should use this formula if it will result in a larger credit.

The TCJA also established a new $500 nonrefundable child care credit for dependents who are not qualifying children (also called the “family care credit”). For example, you may claim this credit for parents or grandparents if they are your dependents for tax purposes. The credit begins in 2018 and is scheduled to last through 2025. Since this credit is nonrefundable, you may benefit from it only if you owe income taxes for the year.

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 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:

  • babysitting
  • 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 daycare 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.

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