Child Tax Credit

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About the Child Tax Credit

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Who qualifies for the credit and which children qualify?  Are there limits based upon income?

The child must be the taxpayer's dependent (for tax purposes), under the age of 17 as of the end of the tax year, a U.S. citizen or resident, and a blood or adoptive son, daughter or grandchild. Stepchildren and foster children qualify as well.   

Married couples filing jointly will find that the credit decreases once their adjusted gross income (as modified by certain less-common addbacks) exceeds $110,000. The $110,000 turns into $75,000 for unmarried persons, and $55,000 for married persons not filing jointly.

Under what circumstances can the credit apply when there is no tax liability?

You must have three or more children who qualify for the child tax credit before you can get the cash refund, and the calculation of the amount of credit and refund you get, if any, is quite complex.

SUPPLEMENTAL CHILD CREDIT FOR FAMILIES WITH ONE OR TWO CHILDREN

In the case of a taxpayer with one or two qualifying children, a portion of the child tax credit may be treated as a supplemental child credit amount under Code Section 32 (i.e., as an addition to the earned income credit allowed under Code Section 32(a)). <2> The amount of the supplemental child credit reduces the non-refundable personal tax credits otherwise allowable for the year, but the amount of this credit (or the resulting reduction) is not to be taken into account in determining the amount of other credits available to individuals. Code Section 32(n)(2).

 The amount of the supplemental child credit allowed under Code Section 32(n) equals the lesser of:

(1) the amount by which the taxpayer's non-refundable personal credits are increased by the Code Section 24 child tax credit; or

(2) the excess of the taxpayer's credits over his total tax liability.

This formula is derived from Code Section 32(n)(1), which specifies that the earned income credit is increased by the lesser of:

(1) the excess of the credits allowed under Subpart A (determined after the application of Code Section 26 and without regard to the supplemental child credit) over the credits that would be allowed under subpart A after the application of Code Section 26, determined without regard to the Code Section 24 child tax credit and the supplemental child credit; or

(2) the excess of the sum of the credits allowed under this part (determined without regard to the Code Sections 31 credit for taxes withheld on wages, the Code Section 33 credit for taxes withheld at the source, the Code Section 34 credit for certain uses of gasoline and fuel, and the supplemental child credit), over the sum of the taxpayer's regular tax and social security taxes.  In no case will the total amount of the supplemental child credit exceed the amount that would result from its calculation as a non-refundable personal credit. H. Rep. 105-220, 105th Cong., 1st Sess. (1997).

REFUNDABLE CHILD TAX CREDIT AMOUNT FOR FAMILIES WITH THREE OR MORE CHILDREN

Although the child tax credit generally is characterized as a nonrefundable credit, for taxpayers with three or more qualifying children for any taxable year, the entire amount of the credit is refundable.  Eligible taxpayers may increase the aggregate credits allowed under Subpart C (i.e., the refundable credits in Code Sections 31 through 35) by the lesser of:

(1) the allowed child tax credit (without regard to the limitations under Code Section 26) , or

(2) the amount by which the aggregate amount of credits allowed by Subpart A (Code Sections 21 through 25A) would increase if the limitations imposed by Code Section 26 were increased by the excess (if any) of the taxpayer's social security tax over his earned income credit. Code Section 24(d)(1).

For tax years beginning after 2001, the amount of this refundable credit is then reduced by any excess of the taxpayer's alternative minimum tax (AMT) over the reduction to his earned income credit resulting from such AMT. Code Section 24(d)(2).   If the taxpayer overstates the refundable amount of the credit, the IRS may recover the overstatement only through the procedures for recovering an erroneous refund. However, an overstatement of the non-refundable portion of the credit results in a deficiency that may be assessed under the deficiency procedures.

 

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