The child tax credit comes into play when there are lots of dependent children in the family or the total income level of the family is lesser than USD 110K in a year. This is the standard income level that is permitted in the USA. Such families can seek to avail exemption on tax returns. Families that earn more than this amount are not eligible for claiming this tax credit completely, irrespective of the number of dependent children. The child tax credit reduces the tax liability to lesser than USD 13,0000. As per Sec. 24 of the U.S.C, the credit diminishes at the rate of 5 cents for every additional dollar earned above the USD 110,000 yearly income limit.
The limit of USD 110K is reduced for applicants who are single parents, guardians, and widows. Such families can claim this credit if their annual income is lesser than or up to USD 75,000. People who are married but going through separation or filing individually on their own capacity as parents can avail the benefits of this credit if their incomes do not exceed USD 55,000. However, only one of the divorced parents can avail this benefit and not both of them.
Claiming Child Tax Credit
In order to be eligible for this tax credit, the applicants will have to submit proof of the following:
- The applicant must provide documents proving that he/she is a US citizen as well as resident.
- Submit proof that the child is below 17 years of age.
- Legal documentation to prove that the child is related to the applicant.
- The child can be your own, step child, adopted, minor sibling, niece, nephew, or grandchild.
- Foster children are also included under this scheme, whereby, if the child has been placed under the protection of the applicant by the court, then the copy of the original court order will be needed.
- The foster parent will also have to show that the foster child has been residing with the foster family for more than 6 months.
- The applicant will have to fill the ‘Long Form’ or fill Form 1040 or 1040 A, so as to claim for the child tax credit.
Benefits of This Tax Credit
- As per the Internal Revenue Services (IRS), this credit reduces your tax liabilities up to USD 1,000 per child without any tax deductions. This is because, unlike tax deductions, this tax credit reduces your tax bill; one dollar at a time and not as a whole.
- Only six basic tests are needed to be passed so as to prove the applicant’s details. These details include verification of – Age, Citizenship, Residence, Relationship, Support, and Dependent.
- A test to prove that the child’s age is below 17 years of age.
- The child cannot and must not have provided for more than half the amount spent on their own support.
- The dependent test must prove that the child is dependent on the applicants federal tax returns.
- You are eligible to claim additional tax credit only if you can prove that the child tax credit is greater than the total amount of the income tax owned by you.
Additional Child Tax Credit
This refundable tax is applicable for those candidates who did not receive the full amount of the child tax credit in spite of having a qualified child. This tax will get refunded even if the applicants do not have any tax liabilities. The additional tax is equal to 15% of the earned income amounting to USD 3,000, that is, in case the total earning does not exceed USD 3000, then you can avail the additional taxes as well as social security taxes paid in that year.
In case your income is above these limits, you will have to refer to IRS Publication 972, ‘Child Tax Credit’ so as to compute the amount you’ll be eligible for as well as the modified gross income.