Posted by Dennis Jao

The Child Tax Credit

The Child Tax Credit

In accordance with the TCJA, significant changes have been made to the child tax credit. These changes affect fiscal years 2020 and 2021 and beyond. This article will cover all the basics of the child tax credit that you should know.


What is the child tax credit?

The Child Tax Credit is an important tax credit for those with eligible dependent children under 17.

A tax credit is a reduction from actual owed taxes, Which is a lot more beneficial than a deduction (a subtraction from your actual income). And this tax credit has the potential to be partially refundable, meaning you can get your money back, not just deduct the taxes you owe.


The 2020 and 2021 child tax credit amount 

As part of the tax reform, the child tax credit has been increased to $ 2,000 per eligible child and will be refunded up to $ 1,400, subject to income phase-out. This is higher than the previous $1,000. Previously, the child tax credit was only refundable if an "additional child tax credit" was claimed.

The refundable value of the child tax credit is 15% of the income received greater than $ 2,500. This amount is limited and can be phased out.


Child tax credit Income levels and phase-out

Phase-outs, which are not indexed to inflation, will begin with an Adjusted Gross Income (MAGI) of over $ 400,000 for married taxpayers filing jointly and over $ 200,000 for all other taxpayers.


How can I claim a child tax credit?

If you have an eligible child, you will need to file an income tax return to claim the credit, even if your income level is below the minimum income to meet the tax limit.

In addition to completing the appropriate lines on Form 1040, you can also submit IRS Schedule 8812.


A new additional dependent credit of $ 500

There is also a new $ 500 non-refundable credit for other eligible dependents (e.g., seniors). Suppose you provide half of the financial support to a father or grandfather, stepfather or stepfather, aunt or uncle, niece or nephew, stepmother, or someone who lives in your home for the whole year. In that case, you can qualify for this credit of $ 500, provided that as long as the dependent did not earn more than $4,300 in 2020. These dependents may include children aged 17 or older at the end of 2020.

The qualified dependent must be a U.S. national, U.S. citizen, or U.S. resident alien. The credit is calculated using the child tax credit in the form instructions. The total of the two credits is subject to a single-phase-out when the adjusted gross income exceeds $ 200,000 or $ 400,000 for married filing jointly.


What is a "qualified child" for the child tax credit?

A child who qualifies for this credit is one who meets the qualifying criteria in six tests: age, relationship, support, dependent, citizenship and residence.

  • Citizenship Test: To pass the citizenship test, the child must be a U.S. national, U.S. citizen, or United States resident alien.

  • Dependent Test: You can claim the child as a dependent, and that you provided at least half of the child support during the fiscal year.

  • Proof of age: To be eligible, a qualifying child must be under 17 (16 or younger) at the end of the year.

  • Relationship Test: to claim a child for child tax purposes, the child must be a son, daughter, stepson, adopted child, brother, sister, half-brother, half-sister, or descendant of one of these persons (including grandchild, grandson, or nephew). An adopted child is always considered as a child of your own. An adopted child includes a child statutorily placed with you for legal adoption.

  • Residence Test: The child must have lived with you for more than half of the tax year. There are a few exceptions to the residency test, which can be found in the IRS 972, Child Tax Credit.

  • Social Security Test: Beginning with the 2018 tax year, your child must have a social security administration number issued before the tax return's due date (including extensions) to be claimed as a qualifying child for the tax child credit or additional tax child credit. Children with an ITIN cannot be claimed for any of the credits. If your child's immigration status has changed and they are now a U.S. citizen or permanent resident, but the child's Social Security card still says "Not valid for employment," request a new immigration card from Social security. If your child does not have a valid SSN, they may still be eligible for credit for other dependents. If your dependent child lived with you in the United States and had an ITIN, but not an SSN, issued before the due date (including extensions), you may be able to claim the new credit for other dependents for that child. 


Support Test: To claim a child for this credit, the child must not have provided more than half of their support during the year.


Tax Credits for Child Care

In addition to the child tax credit, there are child care tax credits that you should consider if you have paid for child care and you will need to complete form 2441for this scenario.


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Dennis Jao
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