As parents, it is your utmost priority to duly look after your child’s needs. Most of you will agree that a ginormous chunk of your earnings goes after the necessities of your children. Do you also come into the league of such parents? It would be best if you then considered the Child Tax Credit. As a measure for some relief to all hardworking parents with dependent children in the American families, the Internal Revenue has in effect the Child Tax Credit. It can act as a good credit scheme to downsize your overall tax liability. After the Tax Cuts and Jobs Act was enacted in 2017, certain key changes were brought in the Child Tax Credit provisions. We will also look at the revised conditions for availing of the credit plan.
We shall dig deeper into comprehending the various crucial aspects of the Child Tax Credit Scheme. It will help you understand whether you can claim the credit in your federal tax return and how you can use it.
What is the connotation of the Child Tax Credit?
This credit scheme stands among the three child-focused federal tax credit schemes which can enable individuals to optimize their tax obligations. A form of a refundable tax credit, the child tax credit is a facility that may be available to taxpayers in the US who have qualifying children or such dependants below 17 years of age as at the end of the given tax year. There are certain other qualifying conditions that a taxpayer must mitigate to take benefit of the scheme. Find out more about the eligibility conditions for availing of the child tax credit.
What are the eligibility criteria for availing of the Child Tax Credit?
A taxpayer must fall under the following criteria to use the child tax credit for your income tax purposes.
- Your modified adjusted gross income must be below the threshold limits of $200,000 for individual return or $400,000 if you are jointly filing your return as a married couple. The adjusted gross income or AGI refers to your gross income, which may comprise elements like your total wages, capital gain, business income, retirement distributions, and alimony. AGI excludes specific payments such as IRA contributions or spending for a health savings account or any education loan interest.
- The tax dependent, on whose behalf you will claim the child tax credit, should be of the age less than or equivalent to 16 years before the relevant calendar year ends.
- One is eligible for the child tax credit if he has paid for a minimum of 50 percent of the amount needed for his child’s support during the previous year and the child has stayed with you for six months or more during that year. The stay condition is subject to some exceptions.
- Your tax dependent should not file a joint return. Even if he files a joint return, he must do it with the purpose of claiming a tax refund. Your child or dependent must have a Social Security Number that is fully valid, and it is issued before the deadlines for tax returns along with the tax returns.
What is the meaning of a Tax Dependent?
A tax dependent refers to a child or a relative of a taxpayer whose behalf he can get particular tax credits and deductions. There can be two types of tax dependents. One is the qualifying child, and the other shall be a qualifying relative.
Qualifying Child
Some of the crucial qualification conditions for a qualifying child include:
- The child should be a part of your family. It comes under the relationship test.
- Your child should be below the age condition stated before. He must pass any one of the age test conditions which the IRS has slated.
- The child must reside with you as per the requirements of the residency test. The IRS has also provided some exception conditions for this rule, which you must consider in special cases like divorce or separation.
- A qualifying child should not have the earning capacity to provide for more than half of his total financial support. Financial support covers household expenses, clothing, travel costs, and other recreational expenditures.
- The child must cater to the requirements of the US citizen or resident test.
Qualifying Relative
Similarly, there are certain conditions for a qualifying relative as well. There is no age limit for the tax dependent, who is a qualifying relative.
- A qualifying relative cannot be another taxpayer’s qualifying child.
- You must have a relevant relationship with the qualifying relative. He must have resided with you for the whole year, subject to some exceptional conditions.
- The dependent relative’s gross income should be lower than the limit specified for the relevant tax year.
- The taxpayer claiming the tax credit for looking after a qualifying relative should pay for more than 50 percent of the total financial support for such relative during the given year.
What is the amount of Child Tax Credit available for you?
Under the scheme, a person can get about $2,000 for every qualifying child dependent on him. Please bear in mind that your child must be below or equal to 16 years of age.
If you have a qualifying dependent who is not your child or your child’s age is more than 17 years, then you can get a $500 non-refundable credit for your tax requirements.
One of the best parts of availing of the Child Tax Credit Scheme is that it is refundable to the taxpayer even if it does not completely set-off your tax bill. It means once you claim the credit, your tax liability gets reduced dollar by dollar. IRS can refund a maximum of $1400 to you in case your tax bill nullifies completely. This amount is known as the additional child tax credit.
What are the provisions for the phase-out of the Child Tax Credit?
Once your total income touches a certain level, the phase-out from the child tax credit begins. After 2017, the income threshold for single filers as well as the joint filers got revised. The limit for income level for single filers rose from $75,000 to $200,000. While for joint filers, the income level for phase-out of child tax credit increased from $110,000 to $400,000.
What is the process to claim the Child Tax Credit?
An eligible taxpayer can avail of the Child Tax Credit scheme on line 12a of Form 1040 for federal tax reporting. One may even declare the claim details on line 49 of Form 1040 NR.
Leverage the benefits available with Child Tax Credit
The Child Tax Credit is a remarkable backing measure for US citizens to ease the taxing task of raising a family. Consider getting some guidance from some tax professionals and consultants to make the most out of the benefit.
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