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Child Tax Credit: Everything You Need to Know

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The Tax Cuts and Job Act of 2017 introduced sweeping reforms to United States tax law. It affected individual income taxes by expanding standard deductions and providing an alternative minimum tax.

The IRS predicted that the changes would decrease the average time taxpayer’s take to complete their returns by 4-7%. They also estimated it would save them between $3.1 and $5.4 billion

The 2017 Tax Cuts and Job Act significantly impacted the Child Tax Credit used by parents across the U.S. as well. Learn everything you need to know about the new requirements for the Child Tax Credit and whether or not you may qualify for additional credit below.

What Is the Child Tax Credit?

The Child Tax Credit refers to a credit offered by the U.S. government to help guardians and parents minimize their tax bill. It applies to each dependent child you claim.

The tax credit does not work like a deduction but does reduce how much money you owe the IRS based on your submitted W-2 form. You subtract the total amount of credit you receive from your tax bill.

How Much Can You Claim?

The Child Tax Credit is $2,000 per dependent child. This increased from $1,000 prior to the 2017 Tax Cuts and Job Act.

Be aware income limits exist and you must make less than the limit to qualify for the Child Tax Credit. Learn more about limits at the end of the next section.

The 7 Vital Requirements for the Child Tax Credit 

Are you not sure if you can get the Child Tax Credit? Here’s a list of the 7 requirements you must meet to qualify.

  1. How Old Is the Child?

The first factor considered is the child’s age. The child or children you want to claim for the tax credit must be 16 years old or younger at the end of that specific tax year.

  1. Is the Child a U.S. Citizen?

The child must also be a citizen of the United States. You may also claim children considered a U.S. resident alien or a U.S. national. Be aware that the term U.S. national refers to any person born in the Commonwealth of the Northern Mariana Islands or in American Samoa. This definition applies for tax purposes only.

  1. What Is Your Relationship to the Child?

The child you hope to claim must be your own biological child, an adopted child, a stepchild, or a legally-authorized foster child. An adopted child refers to any child placed into your custody regardless if the adoption gets finalized by the end of the tax year.

In certain circumstances, you may also claim your own sister/brother or step siblings. You may also claim descendants of these accepted persons like your grandchildren, nephews, or nieces.

  1. How Long Has the Child Resided with You?

The child or children you want to claim for the Child Tax Credit must have lived with you for at least 51% of that specific tax year. Certain exceptions apply to this rule including:

  • If you gave birth or the child died during the tax year, it counts as the entire year.
  • Temporary separations between you and the child (For example, detention in a juvenile facility or anything having to do with military service, medical, care, business, vacation, or school count towards the time.)
  • Certain circumstances for children of separated and divorced parents.

Speak with a tax representative to see if you fit one of these circumstances.

  1. Can the Child Support Themselves?

You cannot claim a child if they provided over half of their own financial support during the specific tax year.

  1. Will You Claim the Child as a Dependent on Your Taxes?

If you do not claim the child on your taxes, you cannot claim them for the Child Tax Credit.

Be aware that the child must be one of the following for you to claim support:

  • Your biological, adoptive, or foster child
  • A sibling, nephew, niece, or grandchild
  • Under 19 years old OR under 24 years old and studying full-time as a student for at least 5 months during the tax year
  • A permanent disability regardless of their age
  • Lived with you for at least 51% of the year
  • Provided less than 50% of their own financial support during the year

Luckily, most of the factors qualifying you to claim a child as a dependent also qualify you to claim the Child Tax Credit.

  1. What Is Your Modified Adjusted Gross Income?

Finally, the government reduces your Child Tax Credit if your modified adjusted gross income, known as MAGI, exceeds a certain amount. Previously, the tax credit’s income cut off started around $75,000 for married couples filing separately.

Now, it’s up to $200,000 for married couples filing separately. Even if you file jointly you can get the full tax credit up to a combined $400,000.

Do I Qualify for the Additional Child Tax Credit?

Before the 2017 Tax Cuts and Job Act, the government made the child tax credit 100% non-refundable. That meant if your tax bill came out to $0 and you still had remaining credit, you couldn’t get that remaining credit amount back as a refund.

The 2017 Act made refunds the standard and put a cap on the refund amount. You may only receive up to $1,400 of that credit as a refund. You must also earn at least $2,500 in income to qualify rather than the $3,000 before the Act.

Bear in mind the IRS plans to adjust the $1,400 cap to account for inflation.

Making Tax Season Easier for Small Business Owners

Keeping up with all the latest changes to tax payment plan as well as tax rules and regulations in the U.S. is a full-time job. If you own your own business, you already have a full-time job on your plate and more.

You may have time to do some quick research on things like the Child Tax Credit. But that doesn’t mean you can learn every rule before drawing up a pay stub or W-2 form.

Published: April 16, 2021
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