Claiming the Child Tax Credit

The Child Tax Credit Can Mean Big Tax Savings

Mother and baby boy reclining on sofa with laptop
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Did you know that there is a hefty tax credit available to many households who have a dependent child? This may come as a surprise to many new parents, but it’s important to plan for so that you can make the most of your money. After all, the credit is worth up to $1,000 per child. One of the real benefits of this is that it’s a tax credit, not a tax deduction. Unlike a tax deduction, a tax credit reduces your tax bill dollar-for-dollar.

Have one qualifying child? That will reduce what you owe the IRS by a full $1,000. Have three qualifying children? That’s right, you just reduced the amount you owe Uncle Sam by $3,000. The credit is limited to those with certain incomes, but we’ll talk about that shortly.

Claiming the Credit

First, to qualify for the credit, you must be able to pass a few tests. The dependent must be a U.S. citizen or resident who are under age 17 at the end of the tax year. You can claim your child, stepchild, adopted child, grandchild or great-grandchild. You may also be able to claim foster children if they were placed with you by a court or other authorized agency. The child must also live with you for more than half the year in which you’re trying to claim the credit. The dependent also must not provide more than half of their own support, which is typically only an issue for older dependents.

It is also worth noting that you must file Form 1040 or 1040A in order to claim the child tax credit.

You cannot currently claim the credit with Form 1040EZ.

Income Limits

As mentioned above, not all taxpayers are eligible for this credit. The current income limits for 2009 and 2010 tax years are as follows:

  • If married and filing jointly you can earn up to $110,000 AGI
  • Single, qualifying widower, or head of household you can earn up to $75,000
  • Married but filing separate you can earn up to $55,000

If your income exceeds the above limits, then your credit will be reduced by $50 for every $1,000 that exceeds the income guidelines. This credit is also a nonrefundable tax credit which means that if you do not have enough tax owed the credit would be reduced so that no refund would be issued. Don’t worry, if you don’t qualify for the full $1,000 child tax credit you may qualify for the additional tax credit.

Additional Child Tax Credit

The additional child tax credit is a refundable tax credit for those who had a qualifying child and did not receive the full amount of the child tax credit. Since this is a refundable credit it is possible to get a refund even if you do not have any tax liability.

Qualifying for the additional child tax credit has the same qualifying and income guidelines. The additional child tax credit is equal to the lesser of the unallowed child tax credit or 15% of your earned income that is more than $3,000. If you did not have earned income of more than $3,000 you may then qualify to claim the additional child tax credit up to the amount of Social Security taxes paid during t he tax year.

In addition, if you also qualify for the earned income tax credit, your additional child tax credit that was based on Social Security taxes would be reduced by the earned income credit you received.