(Editor’s note: Information in this article was accurate at the time of publication on 11/13/2017 and may not reflect updates from the new tax bill.)
Of course you’ve heard the one about death and taxes. But what about birth and taxes? Having kids means spending lots of money, but they can also save you a bundle (of joy) come tax time well beyond their birth year, which is why you need to know about the child tax credit.
First, let’s talk about the difference between a tax credit and a tax deduction. With deductions, you subtract an amount from your income before you figure out how much, if any, you owe. Credits, on the other hand, mean you figure out the amount of tax you owe, if any, and then subtract the amount of the credit. Refundable credits can reduce your tax liability below zero; non-refundable credits don’t.
Qualifications for a Child Tax Credit
With the child tax credit for 2017, you can potentially reduce your final tax bill by up to $1,000 for each qualifying child.
So who qualifies? Biological children, of course, but also step or foster children, their siblings or step-siblings, half-siblings, or a descendant of any of them such as your grandchild, niece, or nephew, according to the IRS.
Qualifying children must be under the age of 17 at the end of the year, and you must claim them as dependents. They won’t qualify if they provided more than half of their own support during the year, and in general, they need to have lived with you for more than half of the year. Additionally, they must be a U.S. citizen, U.S. national, or U.S. resident.
To claim it, you have to file the child tax credit form 1040, 1040A, or 1040NR. Sorry—no 1040EZs.
Who Can Claim a Child Tax Credit?
In short: it's an earnings consideration; the child tax credit phases out the more you earn.
For married couples filing a joint return, this begins at $110,000 of modified adjusted gross income; for married couples filing separately, it begins at $55,000; other taxpayers see the phase-out start at $75,000.
For each $1,000 above these thresholds, the amount of the child tax credit is reduced by 5%, or $50.
How to Get the Tax Credit, and Perhaps a Refund
In general, the child tax credit is a non-refundable credit. So, let’s say your total tax liability is $600 for the year, but you're eligible for a child tax credit of $1,000. That doesn’t mean the IRS will send you a check for $400; you just won’t owe anything. In other words, if your credit exceeds your tax liability, your tax bill is reduced to zero and any remaining unused credit is lost.
That said, you may be eligible for at least a partial refund of the difference, via the Additional Child Tax Credit (ACTC). No, this isn’t a credit for having additional kids. It’s a refundable credit that may allow you to get a refund for the amount of your child tax credit that you couldn’t use. The general rule of the ACTC is a credit of 15% of your taxable earned income over $3,000. Your tax advisor can help determine if you’re eligible.
And remember, the child tax credit is in addition to the credits you get for child and dependent care expenses.
Earmarking the Proceeds?
If you do end up with a refund, perhaps by qualifying for the ACTC, you could consider saving it for future college expenses. TD Ameritrade can help guide you through all the investment choices to develop the most appropriate investing strategy for higher education.
TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.