Child Tax Credit

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DEFINITION of 'Child Tax Credit'

The Child Tax Credit is given to taxpayers for each qualifying dependent child who is under the age of 17 at the end of the tax year. Currently, it's  a $1,000 nonrefundable credit that reduces the taxpayer's liability on a dollar-for-dollar basis, intended to provide an extra measure of tax relief for taxpayers with qualifying dependents. The tax legislation passed in December 2017 doubles the Child Tax Credit to $2,000 per child and makes much of it refundable. 

BREAKING DOWN 'Child Tax Credit'

Because the current Child Tax Credit is nonrefundable, it can only reduce the taxpayer's liability to zero. It should not be confused with dependency exemptions, which may be awarded for dependents who do not qualify for this credit. Some taxpayers can supplement the credit with the Additional Child Tax Credit, which is refundable.

How the 2017 Tax Bill Changes the Child Tax Credit

The tax legislation passed in December 2017 doubles the Child Tax Credit, starting with the 2018 tax year until the end of 2025. The new tax credit is $2,000 per qualifying dependent child. In addition, it makes $1,400 of the Child Tax Credit refundable. This means that even if the parent ends up owing no taxes, or owing less than $1,400, up to that amount can be received as a tax refund if the child and parent qualify.

Qualifying for the Credit

The Internal Revenue Service has established several factors that determine eligibility for the Child Tax Credit. To qualify, the child must be a U.S. citizen, U.S. national or U.S. resident alien. He or she must also have lived with the person who is claiming the tax credit for more than half of the tax year and be claimed as a dependent on the taxpayer's return.

Although most taxpayers qualify for the Child Tax Credit by claiming their children, other family members under the age of 17 may also qualify if the taxpayer provided more than half their financial support during the tax year. Siblings, grandchildren, and nieces and nephews may be eligible for the credit if they meet the age, citizenship and residency tests. Adopted and foster children also qualify for the credit.

Because the tax credit was designed to help families in lower and middle income brackets, it has been reduced or eliminated for earners making above certain income levels. In the 2017 tax year, for married couples who file a joint return, the tax credit is phased out over adjusted gross incomes of 110,000; for single, head of household and qualifying widow(er) filers, the figure is $75,000. However, the new tax law increases these levels to $400,000 for married couples and $200,000 for single, head of household and qualifying widow(er) filers. These higher levels will sunset at the end of 2025.

The 'Additional Child Tax Credit'

For some families, the Child Tax Credit exceeds the amount of the tax they owe. Under current tax law, for the 2017 tax year, they may qualify for the Additional Tax Credit. This is a refundable credit. To qualify, families must have at least three children or other qualifying dependents. The family must also have earned at least $3000 to receive the credit. With the new law, up to $1,400 per child is refundable under the regular Child Tax Credit and the additional credit will lapse.

Who Can Claim the Child Tax Credit

Only one taxpayer can claim the Child Tax Credit, even if the qualifying child divided time between more than one household during the tax year. If one parent had primary custody of the child, that parent usually receives the tax credit. In cases of joint custody, the parents must reach an agreement about when each will claim the credit – in alternate years or according to some other formula.