Lewes CPA
officeProgar & Company, P.A.
Certified Public Accounting services for businesses and individuals
Child tax credit
Dear Reader:
The child tax credit allows you to claim a credit of $1,000 for each
qualifying child. Thus, for example, a taxpayer with four qualifying
children will be entitled to a credit of $4,000.
A qualifying child is someone who (1) lives in your home for over
half the year, (2) is your child, stepchild, adopted child, or
foster child, or your brother or sister or stepsibling (or a
descendant of any of these), (3) is under 17 years old at the close
of the year, (4) does not provide over half of his or her own
support for the year, and (5) is a U.S. citizen or resident. For tax
years beginning after Dec. 31, 2008, the qualifying child must also
be younger than you, must not file a joint return (other than a
joint return filed solely to get a refund), and must be someone for
whom you are allowed a dependency deduction. Special “tie-breaking”
rules apply where a person may be claimed as the qualifying child of
more than one taxpayer.
The dependency deduction that may be claimed for a qualifying child
isn't reduced or otherwise modified because of the child tax
credit.
Where parents are divorced and the custodial parent signs away her
right to the dependency exemption, the child credit is also lost.
The amount of the credit allowable is reduced by $50 for each $1,000
(or part of $1,000) of modified adjusted gross income (AGI) above a
threshold amount—$110,000 on a joint return, $75,000 for single
filers and heads of household, and $55,000 for married individuals
who file separate returns. Modified AGI is generally the dollar
amount shown on the last line of page 1 of your individual income
tax return, but with certain adjustments.
This means, for example, that a married couple filing jointly who
have one qualifying child are entitled to a reduced credit of $950
if their modified AGI is more than $110,000 but not more than
$111,000. They lose the credit completely if their modified AGI is
more than $129,000.
If the otherwise allowable child tax credit is more than the amount
of income tax you owe, the excess is refundable to the extent of the
greater of:
(a) 15% of
earned income above $12,050 for 2008 ($3,000 for 2009 and 2010), or
(b) for
taxpayers with three or more qualifying children, the excess of the
taxpayer's social security taxes for the year over the taxpayer's
earned income credit for the year.
Earned income includes combat pay (excludable from gross income) for
these purposes.
Taxpayers with earned income of $12,050 or less for 2008 ($3,000 or
less for 2009 and 2010) will not qualify for any refundable child
tax credit under the 15% rule (see (a), above), although they may
qualify under the “excess of social security taxes over earned
income credit” rule (see (b), above). Credits that cannot be used to
offset income tax owed (because the credits exceed the amount of
tax) and that aren't refundable are lost.
If you expect the child tax credit to reduce your income tax, you
may want to reduce your wage withholding. You can do this by filing
a new Form W-4, Employee's Withholding Allowance Certificate, with
your employer.
If you qualify for the child tax credit, you may also qualify for
the earned income credit. You can claim both credits if you meet the
requirements for both.
Please call if you have any questions or would like to discuss this
issue further.