What is the Child Tax Credit and Can your Family Benefit this Year?

As all parents know, raising children is expensive.  In fact, the average American family spends roughly a quarter of a million dollars to raise a child to age 18 (and that doesn’t even include college).  The Child Tax Credit (CTC) certainly can’t come close to offsetting all of those expenses, but it can at least supply a little relief.

The CTC has been available for about 20 years, but its amount has recently increased significantly. Currently, it can be worth up to $2,000 for each child that is a dependent under age 17 at the end of the tax year in question. 

Don’t confuse Child Tax Credit with Child Tax Exemption, which, in the past, allowed taxpayers to take a tax deduction for each qualifying dependent.  Whereas a tax deduction only reduces your taxable income (prior to calculating the taxes you owe), the CTC is much more valuable because it reduces your actual tax liability, dollar for dollar.

For example, if you’re in a 24% marginal tax bracket, a $2,000 deduction would save you $480 (2,000 x .24) of taxes.  A $2,000 CTC, on the other hand, would save you $2,000 of taxes, regardless of your tax bracket.

The CTC amount is equal to 15% of qualifying earnings above $2,500.  It begins to be phased out for taxpayers who earn more than $200,000 (filing Single) or $400,000 (Married filing Jointly).  At $280,000 (Single) or $480,000 (Joint), a household receives no CTC at all.

To qualify for a CTC, the child in question must:

  • Be claimed as a dependent on your tax return;
  • Either be your child, or you must be their legal guardian (related children, e.g., siblings and cousins, qualify for the CTC only if you are their guardian and claim them as dependents on your taxes);
  • Have been 16 or younger at the end of the tax year in question;
  • Have lived with you or in your care for at least half the year and must have provided no more than half of their own financial support during that time;
  • Be a legal U.S. citizen, national or resident; and
  • Have had a Social Security number in the year for which they are being claimed.

There have been many adjustments in the CTC this past year:

  • The cap for the CTC doubled—from $1,000 to $2,000 per child;
  • More of the CTC is refundable, and taxpayers can claim the credit if they have just $2,500 of earned income (the previous refund threshold was $3,000);
  • The requirement that the child have a Social Security number was added; and
  • Phase-out thresholds were increased to current levels (the CTC historically only helped struggling families).

Oddly enough, for a tax benefit that is designed to help families afford children, it doesn’t help the poor as much as those who are better off.  A taxpayer must have earned at least $2,500 in order to qualify for any of the tax credit, and to get the full CTC (for one or more children), they must earn at least $30,000 (whether filing singly or married).  In other words, families earning up to $400,000 can claim the full credit, but only those earning $30,000 or more get its full benefit, and those who earn less than $2,500 get no benefit at all.  

Finally, remember that the Child Tax Credit is available because you support one or more dependent children during the tax year.  It is a per child credit.  Thus, if you have three children, you can apply three tax credits.  While that isn’t nearly enough to offset the cost of raising children, it can certainly help.

Viridian RIA LLC is an SEC Registered Investment Advisor (RIA) with clients across the United States. Viridian offers financial planning, investment management, and tax services (through its sister company, Viridian Tax and Accounting). Co-written by Shannon McCarty is Viridian’s Director of Marketing.

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