CARL WATTS & ASSOCIATES

April 2nd, 2012

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The Child Tax Credit (CTC) is a popular federal tax credit for families raising children.
The CTC is actually the largest tax code provision benefiting families with children. Just for 2011 only, it is estimated that 35 million families will claim credits totaling about $50 billion.
Up until 2001 the CTC was $500 per child. The Economic Growth and Tax Relief Reconciliation Act of 2001 doubled the CTC amount to $1,000 per child, made it refundable for more families and allowed it regardless of AMT liability.

The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 extended those temporary provisions through 2012. Barring further extension, the CTC will revert to $500 per child in 2013.

The Child Tax Credit is available to eligible taxpayers with qualifying children.

A qualifying child for this credit is a child who meets the qualifying criteria of seven tests: age, relationship, support, dependent, joint return, citizenship and residence.


Age test:

  • the child must be under age 17 at the end of the year (that is, the child is 16 years old or younger);
  • the child is younger than the taxpayer.

Relationship test:

  • the child is related to the taxpayer as a son, daughter, stepchild, foster child, adopted child, brother or sister; or a descendant of any of these relations such as a grandchild, nephew, or niece.

Support test:

  • the child did not provide more than half of his or her own financial support.

Dependent test:

  • the child meets the criteria to be claimed as a dependent of the taxpayer;
  • the child is claimed by his or her parents; if claimed by someone else, that person must have an adjusted gross income higher than the adjusted gross income of either parent.

Joint return test:

  • the child does not file a joint tax return with his or her spouse (although some exceptions may apply).

Citizenship test:

  • the child is a citizen or resident alien of the United States.

Residence test:

  • the child lived with the taxpayer for more than half the year.
Child Tax Credit
An eligible taxpayer for the CTC must, of course, have qualifying children and a certain income level, or, to be more exact, a certain modified adjusted gross income.

The CTC, like other credits, is gradually reduced based on a person's income for the year. The child tax credit starts to be reduced when income reaches the following levels:

  • $55,000 for married couples filing separately,

  • $75,000 for single, head of household, and qualifying widow(er) filers, and
  • $110,000 for married couples filing jointly.

In the phaseout range, the child tax credit is reduced by $50 for each $1,000 of income above these threshold amounts. These phaseout ranges are set by statute and not indexed annually for inflation.

In addition, the CTC is generally limited by the amount of the income tax and any alternative minimum tax you owe.

The only CTC parameter indexed to inflation is the threshold over which families may receive a refundable credit. As the nominal threshold rises, families must earn more each year to receive the same refundable credit. This situation only affects families who do not have enough tax liability to get the entire $1,000 per child credit.

For some taxpayers, utilizing the child tax credit can reduce their federal income tax liability to zero. In that situation, any excess or remaining child tax credits may be refundable to the taxpayer.

This is called the Additional Child Tax Credit. The refundable portion of the credit has two different methods of calculation depending on the number of children the taxpayer is claiming.

For taxpayers with one or two children, the refundable portion of the child tax credit is the smaller of the unused portion of the child tax credit or 15 percent of the person's earned income over $3,000.

For taxpayers with three or more children, the refundable portion of the CTC is the smaller of the unused portion of the child tax credit, or the larger of either 15% of the earned income over $3,000, or the sum of Social Security and Medicare taxes paid minus the earned income credit.

A military taxpayer’s nontaxable combat pay may be added to the earned income which may result in a larger credit. 

You can claim the Child Tax Credit on your 1040 form.

The Additional Child Tax Credit is claimed using Form 8812 that you must file together with your tax return.

Tax credits are taken in a certain order and it is useful to note that the Child and Dependent Care Credit and the Adoption Credit are taken before the CTC.

Professional help in planning ahead and calculating which credit serves you better is certainly recommendable.
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