Claiming the New and Improved Child Tax Credit

The Child Tax Credit can reduce what you owe the IRS

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The U.S. Department of Agriculture put the average cost of raising a child through age 17 at $233,610 in 2017, the last year for which comprehensive statistics are available. Fortunately, the Internal Revenue Service affords parents and other adults with dependent children a way to recoup some of the expense of raising kids—by claiming the Child Tax Credit (CTC) on their returns. This credit can put money back in their pockets.

The CTC didn't just survive the Tax Cuts and Jobs Act (TCJA) that took effect in 2018. It actually got better under the terms of the TCJA. But these TCJA rules are only in place through the end of the 2025 tax year unless Congress takes steps to renew the legislation at that time.

How Much Is the Child Tax Credit Worth?

The CTC was worth up to $1,000 per child in the 2017 tax year. It increased to up to $2,000 per child beginning in 2018 thanks to the TCJA.

Unlike a tax deduction, which can only reduce your taxable income, a tax credit directly reduces your tax bill dollar-for-dollar. And part of the credit is refundable. The IRS will send you a check for a portion of any part of the credit that's left over after it eliminates your tax bill.

For example, if you're eligible to claim the entire $2,000 credit and you owe the IRS $1,000, you could receive a refund of up to $1,000 for the balance. This is a beneficial tax credit indeed. Unfortunately, not everyone will qualify for it.

Determining Eligibility to Claim the Credit

You must be able to pass a few tests to qualify for the CTC. First, your dependent must be a U.S. citizen or resident and she can be no older than age 16 on the last day of the tax year. You can claim your child, stepchild, adopted child, grandchild, or great-grandchild. You might also be able to claim foster children if they were placed with you by a court or other authorized agency.

The child must live with you for more than half the year, but temporary absences are OK, such as because your child attends a boarding school away from home. He's nonetheless considered to have been living with you during this time.

The dependent also cannot provide more than half his own support, which is typically only an issue for older dependents. As of 2018, the child must have a valid Social Security number at the time you file your tax return.

CTC Rules for Divorced or Separated Parents

Special "tiebreaker" rules apply to divorced and separated parents. The credit will go to the parent with whom the child lived most during the tax year. The parent with the highest adjusted gross income (AGI) gets the credit if the child lived with both parents the same amount of time.

Income Limits for the Child Tax Credit

Qualification is also based on your household income and filing status. You can claim the credit for the 2018 tax year if: 

  • You're married and filing jointly with a modified adjusted gross income of $400,000 or less
  • You're single, a qualifying widower, or head of household with an AGI of $200,000 or less

You must add back to your income any foreign income exclusions you might have claimed. The amount of the credit begins reducing and is eventually eliminated for taxpayers who exceed these income thresholds.

The Refundable Portion of the Credit

The Child Tax Credit was nonrefundable in 2017. The IRS would not issue you a refund if any of the credit was left over after erasing your tax debt, although you might have also been able to claim the Additional Child Tax Credit, which was refundable.

All that changes in 2018 under the TCJA. The Additional Child Tax Credit has been eliminated, but up to $1,400 of any unused balance of the CTC is now refundable. The $1,400 figure is indexed for inflation, so it can be expected to increase periodically.

Your refund is equal to 15 percent of your earned income above $2,500, up to $1,400. If 15 percent works out to $1,500, you would still only be refunded $1,400.

You're Not Out of Luck If Your Child Is Older than 16

You can't claim the CTC if your child dependent is older than age 16 on the last day of the tax year, but you can potentially claim the Family Tax Credit for him instead if he meets all other qualifying rules. Unfortunately, this credit is only $500, but that's still better than nothing.

This is a new credit provided for under the terms of the TCJA.

Additional Tax Breaks for Parents

Aside from the CTC and the Family Tax Credit, there are other tax breaks parents might benefit from. The Child and Dependent Care Credit is designed to offset the cost of daycare or other childcare expenses for qualifying children. The credit is worth from 20 to 35 percent of costs up to $3,000 for one qualifying child and up to $6,000 for more than one qualifying child as of 2018. 

Parents of college-age children might also benefit from claiming the tuition and fees deduction, or the student loan interest deduction for student loan interest paid on behalf of their child. Lower income families might be able to take advantage of the Earned Income Credit, which maxes out at $6,444 in 2018.

Maximizing every credit and deduction you're eligible for can shrink your tax bill or increase your refund for the year. When in doubt, consult a tax professional to determine eligibility.