The child tax credit is worth up to $2,000 for the 2020 tax year, for those who meet its requirements. Having dependent children may also allow you to claim other significant tax credits, including the earned income credit (EIC). Together, the tax savings are substantial for many American families.
The child tax credit is phased out at higher income levels. The credit is reduced to zero in stages as income rises above $400,000 on joint returns, and above $200,000 on single and head of household returns.
If you didn’t qualify in prior years, recheck your eligibility each year so you don’t miss out on this tax break.
As part of the American Rescue Plan Act of 2021, the child tax credit cap in 2021 has been increased to $3,000 for those ages 6 to 17 and $3,600 for those under age 6. The credit is also now fully refundable. The credit now starts to phase out at the following income levels: $75,000 for single filers, $112,500 for heads of households, and $150,000 for married couples filing jointly.
How a Child Qualifies as a Dependent
You must meet certain conditions if you’re going to claim your child as a dependent. You must make sure that you pass the relationship test. There are various relationships that qualify:
- You are the child’s legal parent by blood or marriage, or you adopted the child.
- The child is your stepchild or foster child.
- The child is a sibling, stepsibling, or half-sibling.
- The child is a dependent of any of these relatives.
The child also must be living with you for more than six months during the year unless divorce or separation prevents it. The birth or death of a child during the year may be exempt from this condition.
The child’s age also factors in by the end of the tax year. The child must be younger than 19 or as old as 24 if they are a full-time student for at least five months during the year. Children who are permanently disabled are exempt from the age rule.
A child may not have provided more than half of their own support during the tax year. Finally, the child may not file a joint tax return unless to claim a refund for taxes withheld.
Taxes, Children, and Divorce
Only one person can claim a child as a dependent during the same tax year, which means both parents cannot do so, including those who are divorced. In the case of divorce, the parent with whom the child resided for the majority of the tax year can make the claim. If both parents get equal time during the tax year, then the parent with the highest adjusted gross income (AGI) can make the claim.
If taxpayers are not the child’s parents, then the one with the highest AGI can claim the dependent on their tax return.
Noncustodial Parents and the Exemption
The noncustodial parent may take the dependent exemption in some cases, but it requires the cooperation of both parents, plus two pieces of paper:
- The custodial parent relinquishes their right to the exemption by signing Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, and;
- The noncustodial parent attaches Form 8332 to their tax return.
Earned Income Credit and Qualifying Child Criteria
A qualifying child cannot be claimed by more than one person to get the earned income credit. The child also must meet the relationship, age, and residency tests. If you don’t have a child, then you (or your spouse, if filing jointly) must be at least age 25, but under age 65. Also, you (and your spouse, if filing jointly) cannot qualify as the dependent of another person.
The American Rescue Plan also expanded the eligibility for the EIC, eliminating the upper limit (65 years old) and reducing the lower limit to age 19.
Finally, you (and your spouse, if filing jointly) must have lived in the United States for more than half of the tax year.
A qualified dependent for tax purposes can be either a qualifying child or another qualifying relative (the child tax credit and EIC may not apply to other qualifying relatives). To qualify as a dependent, the child must either be a citizen or resident of the United States or a resident of Canada or Mexico. If a resident of Canada or Mexico, then the child must meet all of the other qualifications for the tax credit and have a Social Security number.
You cannot claim anyone as a dependent if that person also files a tax form and takes the personal exemption on it or claims dependents. Anyone who is married and filing a joint return may not be claimed as a dependent.
There is a $500 credit for other dependents who do not qualify for the $2,000 child tax credit. The dependent must be a U.S. citizen, U.S. national, or U.S. resident. The dependent also must have a valid identification number (ATIN, ITIN, or SSN).