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Child Tax Credit

Last Update Date : December 19, 2018

Nowadays, raising a child is expensive. We are fortunate enough that the IRS has provided many tax credits in which one such is the Child Tax Credit which helps the working families reduce their tax bills. Here, is what you should know about this credit in this guide by H&R Block, India.

What is Child Tax Credit?

A Child Tax Credit is a type of credit given to taxpayers at the end of every year for every eligible dependent child who is less than the age of 17 depending on the income of the taxpayer as per the U.S. Income Tax laws. It is a credit which minimizes the tax bill on dollar for dollar basis.

History of Child Tax Credit

The Child Tax Credit was introduced as a small and non-refundable credit for each qualifying child less than the age of 17 under the 1997 legislation and was available from the year 1998. After the introduction, it has undergone many changes in the past 20 years.

Child Tax Credit – Reforms 2018

The recently passed tax reform bill, Tax Cuts and Jobs Act (TCJA), made changes in the Child Tax Credit for 2018-25. Some of the important factors to be noted are:

  • Credit – The credit worth initially used to be $400 per qualifying child less than the age of 17 but eventually changed over time. Now, the credit is up to $2000 per qualifying child under the age of 17 at the end of the year as per the income level and based on phased out limits.
  • Credit Refund – After the recent changes made, the credit is refundable up to $1400, This amount will be adjusted based on the inflation.
  • Income Threshold – The earned income limit has been lowered to $2500 per family for claiming the refundable portion of the child tax credit.
  • Credit Phase Out – A phase-out aspect has been added to the prevalent CTC which states that if the Adjusted Gross Income (AGI) crosses the limit of $200,000 for a single taxpayer and $400,000 for joint taxpayers then the CTC will be adjusted accordingly.
  • Qualification – A qualifying child is one who meets the criteria of all of the six tests, i.e. age, relationship, dependent, support, residence and citizenship.
  • SSN – In order to claim the child tax credit, the dependent who qualifies for a child tax credit of $2,000 must have a valid Social Security Number (SSN).

Tax Brackets

Tax brackets are the tax tables or tax slabs according to which the taxpayers are liable to pay tax and the table depends on the tax filing status of the taxpayer. The tax rate differs based on the filing status. The tax rate for single filing status will be different from married filing joint status.

Eligibility for Child Tax Credit

The section 24(h) contains all the criteria’s listed for the eligibility status of the Child Tax Credit. For claiming the credit, the child must fulfil all the requirements. The requirements are listed below:

  • Age Test – To qualify the criteria the child is required to be less than the age of 17 in the current year for which the tax is claimed (2018 if you’re filing in 2019).
  • Relationship Test – the child is required to be own child, a foster child or a stepchild of the claimant(s).
  • Support Test – The child must be provided with more than 50% of the financial support from the claimants.
  • Dependent Test – In order to claim the credit, the dependent child must be own child, foster or adoptive; must be under the age of 17 and a full-time student for a period of at least 5 months for the taxation year and the child must be claimed as dependent on the federal tax return.
  • Citizen Test – The student must be a U.S. resident or a U.S. National or a resident alien of U.S. and must be having a valid SSN number.
  • Resident Test – To claim the credit the student must have lived with the claimants for at least more than half of the tax year.
    Some Exceptions:

      a. A child born in the tax year is regarded to be living with the claimants for the entire year.
      b. Temporary absences (of the student or claimants) for special occasions such as vacations, etc. are regarded as the period lived with the claimants.
      c. There are other exceptions for children of claimants who divorced or separated.
  • Family Income Test – If the Modified Adjusted Gross Income (MAGI) is higher than a certain limit then the Child Tax Credit begins to phase out. This depends on the tax filing status of the claimant(s).

How much can be claimed?

For the tax year 2018, the phase-out begins at $200,000 AGI for those filing single (the previous phase-out started at $75,000).

Below, we explain where the new phase-out levels begin depending on your filing status. So it starts getting phased out based on the below limits.

  • Single, head of household, or married filing separately: $200,000
  • Married filing jointly: $400,000

Refundability Status

The TCJA has combined the two 2017 tax-credits, the Child Tax Credit and the Additional Child Tax Credit as one. The recent changes in the tax bill have provided for a refund of $1,400 of the $2,000 per child tax credit. This facility is provided to those families in the U.S. whose CTC is more than their tax liability.

Credit Thresholds

After the reform, the income qualifications required for the Child Tax Credit has changed. Initially, the credit was available only for families who fall under the low or middle-income slab. The 2018 CTC states that it is now more widely available depending on the filing status and threshold limits.

Credit Phased Out

The overall credit for the families whose yearly income exceeds the upper limit is reduced. The phase-out according to 2018 for married taxpayers is $400,000 and above and for individuals it is $200,000. For each $1000 dollar earned more than the limit, an amount of $50 is reduced.

Tax filing status Max AGI for full credit AGI where credit disappears
 

Single

 

$200,000

 

Over $240,000

 

Married Filing Jointly

 

$400,000

 

Over $440,000

 

Head of Household

 

$200,000

 

Over $240,000

 

Married Filing Separately

 

$200,000

 

Over $240,000

How can H&R Block help you?

Saving taxes and filing income tax return accurately becomes very easy when you have professional help. This is where we come into the picture. You can either use our intuitive tax filing platform to easily file your tax return or let our tax experts file it for you. We have a team of in-house tax experts who can accurately file your tax returns online while giving you maximum tax benefits.

People also ask

Q. Can I claim a child tax credit for my son who is a U.S. citizen living abroad with my spouse?

A. Yes, you can claim a child tax credit for the son, as he is a US citizen, even though he is outside of U.S.

Q. What is a new rule for child tax credit? Does it have any impact on a Nonresident alien child who doesn’t have SSN?

A. In order to claim the child tax credit benefit, you just need to have an SSN. However, you can also apply for an ITIN by filing W7 form and qualify the child as dependent on the return.

Q. Do U.S. citizens living abroad and paying taxes in foreign countries are entitled to Child tax credit?

A. Yes, they can claim the child tax credit, if the child residing with them is U.S. citizen and they meet the eligibility criteria.

Q. Can I claim a tax credit for childcare if I had a dependent child care savings account?

A. Yes, you can claim it.

We hope that this guide helps you know about the Child Tax Credit and the recent amendments made to it by the Tax Cuts and Jobs Act so that you can file your Income Tax as per the new tax norms and avail the credits accurately.

Not sure how to file your U.S. Tax Return? Let H&R Block help you file your taxes.

Still Have Questions?