Child Tax Credit: What It Is, How It Works And How To Qualify

Now, here's a real tax savings to the individual taxpayer with dependents. The child tax credit is a direct federal income tax credit which is based on the number of dependent children in a family. This federal tax credit is available to give credit to those taxpayers that have an income below certain established levels. The Child Tax Credit was introduced in 2003 and extended through 2012. The maximum credit per qualified child that can be claimed is $1000 and is first applied to reduce or eliminate the taxpayer's federal tax liability.

How does this federal tax credit work and who qualifies for this credit?  Let’s start with the Child Tax Credit qualifications first.  Every family with children qualifies, however the federal tax credit phases out when income is above $110,000 for married filing jointly, $75,000 for single, head of household, or widow, and $55,000 for married filing separately.  Additionally, the child tax credit might be limited by the amount of income tax you owe in addition to any alternative minimum tax you may owe.  But like everything else in this world, there are exceptions.  If the amount of your child tax credit is higher than the amount of federal income tax you owe, you may be able to claim a portion or all of the difference as an "additional" Child Tax Credit. 

First exception:  if your earned income exceeds $10,750, you might be able to claim up to 15% of that amount.  Second exception:  if you have three or more qualifying dependent children in your family, you might claim up to the amount of Social security taxes you paid throughout the year, minus any Earned Income Tax Credit you received.  If you qualify for both these exceptions, you receive the greater of the two amounts, up to the difference between your federal tax liability and your regular Child Tax Credit.  For further information and to make sure you get the most benefits from this credit, you might want to consult a tax professional. 

Now, to answer the "how does the Child Tax Credit work" aspect; the best approach might be to only break down the requirements, and explain each fully.  The child tax credit is the responsibility of the Internal Revenue Service (IRS), and the credit issuance is determined through the federal tax returns the individual taxpayer completes every year.  Taxpayers must complete either form 1040 or 1040A and the IRS form 8812.  The IRS will then determine eligibility, and process accordingly; the requirements and limits change in a yearly basis, so the individual's eligibility may change every year. 

To qualify it will depend on a family’s income, which chances every year and is based upon the inflation.  There must also be no less than one qualifying child.  In order to be classified as a "qualifying child", the child must meet the following requirements: under age 17 of the tax year, claimed on your tax return as a dependent, must pass the relationship test (son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendent of any of these individuals, which includes grandchild, niece or nephew, and also an adopted child), be a US citizen, a US national, or a resident alien, and have a social security number.  Also, the child must pass the support test, which indicates he/she must not have provided more than half of their own support.  Additionally, the child must have lived with you for more than half of the year being claimed, although there are some exceptions to this rule. 

During its original year of inception, a lot of families with qualifying children were mailed an advance federal income tax credit of either $300 or $400 dollars; but they were also told this would decrease their end-of-year tax credit, dollar for dollar.   

The procedure used for deciding the tax credit is quite simple, and is not complicated to calculate; however, any individual taxpayer with doubt should look for the advice and help of a tax professional when preparing their federal tax return. 

The credits, as indicated earlier are claimed when you complete forms 1040 or 1040A and file your returns with the Internal Revenue Service.  Even though many individual taxpayers pay for a professional to complete their federal tax returns every year, there are qualified tax preparers that are available free of charge each year, through the IRS; either way, ensure that you communicate your qualifications for the child tax credit, and check your tax return to confirm that the credit was applied.  You don't want to let this tax credit slip by. 

The child tax credit, along with the Hope and Lifetime Learning credits are a direct means to affect the individual taxpayer's tax liability and provide some level of tax relief.  This credit was created to help parents with the costs associated in raising children, and educating them.  Most often, the child tax credit is a way to ease the existing federal tax liability for middle income taxpayers.  For the extremely low income families, there is frequently no income tax due, so there is no allowable tax credit.  Even if it doesn't help the poverty level income families as a type of federal income tax refund or tax-free income, it doesn’t help to alleviate any federal tax liability.  The Earned Income Credit is used by lots of poverty level or low-income families as a supplement to their earned income.