Understanding the Child Tax Credit

Thanks to the American Taxpayer Relief Act (also known as the “fiscal cliff” tax bill), one popular tax credit has now become permanent: the Child Tax Credit. However, since we’re dealing with the IRS here, the details of this credit can be a little difficult to figure out. Here is what you need to know about both the Child Tax Credit and the Additional Child Tax Credit so that you can maximize your allowable tax credit:

Basic Requirements

As far as eligibility for the credit goes, the requirements are fairly simple:

• You must have a dependent child who is under the age of 17 at the end of the tax year.
• That child must not have provided more than half of his or her own financial support.
• The child must live with the taxpayer for more than half the tax year.

For each qualifying child, the taxpayer will receive a $1,000 credit on their taxes. This means that if the taxpayer owes any money, that $1,000 per kid will go toward wiping out their tax burden.

However, it’s important to note that the credit begins phasing out for taxpayers earning above a particular threshold:

• Married filing jointly $110,000
• Head of Household or single filers $75,000
• Married filing separately $55,000

Those taxpayers earning more than the threshold are eligible for a reduced credit, and they will need to use Publication 972 in order to calculate their credit.

Nonrefundable Credit

The other aspect of the child tax credit that can be confusing is the fact that it is a nonrefundable credit. That means if the amount of the credit you are entitled is higher than your tax liability, you don’t get the difference back as a refund. For example, a family with two children with a tax liability of $1500 would owe the IRS nothing because of their $2000 child tax credit—but they will not see the $500 left over from that credit in the form of a refund.

The Additional Child Tax Credit

Here’s where things get complicated. While the child tax credit is nonrefundable, there is an Additional Child Tax Credit (so named because things aren’t confusing enough), which is refundable. So even if you would erase your tax liability with the original child tax credit and lose out on a refund, you may still be eligible for a refund through the additional child tax credit.

Confused yet?

Here’s how it works. If the child tax credit is higher than your tax liability, you may be eligible for that money as a refund through the additional child tax credit. The requirements for eligibility for the additional credit are the same as for the original credit (dependent child under 17, etc), and it allows taxpayers to take a $1,000 credit for each child. For this credit, you will either receive:

• The amount of unused child tax credit (in the example of a family with two kids and a $1,500 liability above, the unused credit would be $500)
Or
• 15% of the taxpayer’s taxable earned income that is over $3,000.

You will receive whichever of those two amounts is lower.

In order to calculate your additional child tax credit, you will need to complete Form 8812 to send with your tax return.

The Bottom Line

Although the details of this tax credit can feel a little convoluted, taking the time to get your child tax credit will certainly be worth it. You might even feel like taking the kids out for an ice cream on tax day to thank them.