Got Kids or Young Dependents? Claiming the Child Tax Credit

Editor’s note: Information in this article was accurate at the time of publication on 1/9/2020.

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.

What Is the Child Tax Credit?

First, there’s a 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; nonrefundable credits don’t.

For the 2019 tax year, there are some changes to the child tax credit you should know about. If you have young children or dependents, you can potentially reduce your final tax bill by up to $2,000 for each qualifying child. But that doesn’t mean you’ll automatically receive that amount for each child. You could also claim an additional $500 nonrefundable credit for other qualifying dependents.

Who Qualifies for the Child Tax Credit?

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 U.S. citizens, U.S. nationals, or U.S. residents.

You can claim the child tax credit on form 1040 or 1040-NR. Sorry—no 1040-EZs. So how much is the child tax credit? To figure it out, use the child tax credit worksheet provided by the IRS and include Schedule 8812 when filing your 2019 tax return. 

Who Can Claim the 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 for the 2019 tax year, the child tax credit phaseout begins at $400,000 of modified adjusted gross income. For single filers, the phaseout begins at $200,000. 

For each $1,000 above these thresholds, the amount of the child tax credit is reduced by 5%, or $50.

How to Get the Child Tax Credit and Perhaps a Refund

The child tax credit is now refundable up to $1,400. So if your total tax liability is zero for the year, you could potentially receive a refund from Uncle Sam of $1,400 for each qualifying dependent. But there are certain income requirements you’ll need to meet to qualify for this refund. And there’s a cap on the refundable portion—15% of earned income that exceeds $2,500. 

Previously, the child tax credit was nonrefundable, and you may have been eligible for at least a partial refund of the difference via the additional child tax credit (ACTC). But the ACTC is pretty much phased out. 

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, 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.