Link and Learn - Child Tax Credit Flashcards
Child Tax Credit
The child tax credit is unique because taxpayers who cannot benefit from the nonrefundable credit may be able to qualify for the refundable additional child tax credit on Schedule 8812. In this lesson, we will learn about both credits and their relationship to each other. Some taxpayers may not be aware of it, so your time, effort, and understanding of this unique credit may result in a lower tax for the taxpayer.
In tax software, the child tax credit is entered on the nonrefundable credits screens; the additional child tax credit is entered on the payments screens. Form 1040EZ taxpayers cannot take this credit.
The intake and interview sheet, along with the interview tips in the Volunteer Resource Guide, Nonrefundable Credits tab will be your critical tools in determining eligibility for the credit.
Overview
The child tax credit is a nonrefundable credit that allows taxpayers to claim a tax credit of up to $1,000 per qualifying child, which reduces their tax liability.
Additional Child Tax Credit
Taxpayers who claim the nonrefundable child tax credit, but do not qualify for the full amount, may be able to also take the refundable additional child tax credit by completing Schedule 8812, Child Tax Credit; this may result in a refund even if the taxpayer doesn’t owe any tax. Taxpayers who claim the additional child tax credit must claim the child tax credit as well, even if they do not qualify for the full amount.
Qualifying Child
To be eligible to claim the child tax credit, the taxpayer must have at least one qualifying child. To determine whether a child meets the criteria of qualifying child for the child tax credit or additional child tax credit, begin by reviewing the Marital Status and Household Information section of the taxpayer’s intake and interview sheet. Use the interview techniques and tools discussed in earlier lessons to determine if the child qualifies. To qualify, the child must:
Meet the relationship criteria
Meet the age criteria
Not have provided over half of his or her own support
Have lived with the taxpayer for more than 6 months of the tax year (remember the special rules for divorced or separated parents or parents who live apart)
Be a U.S. citizen, U.S. national, or resident of the U.S.
Ed’s son, Jeff, turned 17 on December 30. He is a citizen of the United States and has as valid SSN. According to the child tax credit rules, he is not a qualifying child for the child tax credit because he was not under the age of 17 at the end of the tax year.
To be a qualifying child for the child tax credit, the child must be claimed as the taxpayer’s dependent
Children of Divorced or Separated Parents or Parents Who Live Apart
There are special rules for children of divorced or separated parents, as well as children of parents who live apart. The custodial parent is the parent with whom the child lived for the greater number of nights during the year. The other parent is the noncustodial parent. In most cases the custodial parent may claim the dependency exemption for the qualifying child. The noncustodial parent, however, may be entitled to claim the dependency exemption for a child and thus the child tax credit and additional child tax credit. Review the Child Tax Credit Interview Tips in the Volunteer Resource Guide, Nonrefundable Credits tab for additional information.
Remember, a custodial parent’s release of the dependency exemption will also release the child tax credit and the additional child tax credit, if either applies, to the noncustodial parent. Noncustodial parents must attach Form 8332 or a similar statement to their return each year the exemption is claimed.
Check Your Knowledge
Mary and Ralph got divorced in 2003. They have one child together, Amy, who lives with Mary. All are U.S. citizens and have SSNs. Mary and Ralph provide more than half of Amy’s support. Mary’s AGI is $31,000, and Ralph’s AGI is $39,000. Amy is 12 years old. The divorce decree does not state who can claim the child. Mary signed Form 8332 to give the dependency exemption to Ralph.
Ralph can claim Amy as a dependent and the child tax credit. Mary can use Amy to file as Head of Household and claim the earned income credit and the child and dependent care credit as long as she meets the requirements for those specific benefits.
Figuring the Credit
The maximum amount taxpayers may claim for the nonrefundable child tax credit is $1,000 for each qualifying child. The amount actually claimed on Form 1040 depends on the taxpayer’s tax liability, Modified Adjusted Gross Income (MAGI), and filing status. The amount of the credit may be reduced if the taxpayer’s:
Tax liability minus the majority of the nonrefundable credits is less than the maximum child tax credit, or
MAGI is above the amounts shown below based on the following filing status:
Married Filing Jointly - $110,000
Single, Head of Household, or Qualifying Widow(er) - $75,000
Married Filing Separately - $55,000
Amount of the Credit
The actual amount of the child tax credit is figured using worksheets, but you must determine which worksheet to use for each taxpayer. Review steps 6 and 7 in the Child Tax Credit Interview Tips in the Volunteer Resource Guide, Nonrefundable Credits tab.
Additional Child Tax Credit
The additional child tax credit is for certain individuals who do not qualify for the full amount of the (nonrefundable) child tax credit. The additional child tax credit is refundable, so it may entitle taxpayers to a refund, even if they do not owe any tax.
Like the child tax credit, the additional child tax credit allows eligible taxpayers to claim up to $1,000 for each qualifying child after subtracting the allowable amount of child tax credit. For taxpayers with earned income over $3,000, the credit is based on the lesser of:
15% of the taxpayer’s taxable earned income that is more than $3,000 or
The amount of unused child tax credit (caused when tax liability is less than allowed credit)
Taxpayers who do not get the full $1,000 of the child tax credit may qualify for the additional child tax credit. For detailed requirements, see the Additional Child Tax Credit Tip in the Volunteer Resource Guide, Nonrefundable Credits tab.
Exceptions
There is another method to compute the additional child tax credit for taxpayers with three or more qualifying children. These taxpayers may benefit if they:
Had social security or Medicare taxes withheld from their pay
Were self-employed and paid self-employment tax
Paid tax on tips not reported to their employer
Did not receive the maximum available child tax credit
The amount of the taxpayer’s earned income credit is a factor in this calculation on Schedule 8812
