Raising children is not only a labor of love, but it may also present a challenge to a parent’s pocketbook. Aside from this financial challenge, many modern families find themselves under an expanded parenting description that includes more options than the conventional mom-and-dad duo, which can also present a challenge. As a result, the children in today’s world are often members of single-parent families, blended families, foster families and even extended families in which a grandmother, uncle or other non-parent is at the helm of the family. Although there may be plenty of love to go around, the IRS only allows one person (or one married couple filing a joint tax return) to claim each child as a dependent and receive a tax benefit.
A child must first meet the IRS qualifying child guidelines as your dependent – even if the child is not your child – before you can claim the child tax credit, which reduces the taxes that you owe. The amount of the credit you're allowed to claim depends on the amount and type of your income.
Qualifying Child Dependent Guidelines
For tax purposes, the IRS requires a child to be a U.S. citizen, U.S. national or U.S. resident alien with a valid Social Security number before the due date of your tax return, including filing extensions. The child must also meet these six qualifying tests before you can claim the child on your taxes:
- Relationship test. A child must be related to you as your daughter, son, stepdaughter, stepson, sister, brother, half-sister, half-brother, stepsister, stepbrother or a descendant of any of these, such as a granddaughter or nephew. Two exceptions to the relationship test are 1) an adopted child, who is always considered your child as long as the child was placed with you through a legal adoption, and 2) a foster child, who you can legally claim as your dependent as long as the child was placed with you by a court order or an authorized agency. Examples of authorized agencies include state and local governments, tax-exempt agencies that are licensed by state and local governments and Indian tribal governments.
- Age test. A qualifying child cannot be older than you or your spouse (if you file jointly with your spouse). The child must be younger than 19 on the last day of the tax year unless the child is a full-time student who is younger than 24 years of age. An exception to the age test includes children who become permanently disabled at any point during the tax year. There is no age limit on disabled children.
- Support test. A qualifying child cannot provide more than half his support during the tax year. The IRS defines support as food, shelter, clothing, medical expenses, transportation and recreation.
- Residency test. Your qualifying child must live with you for more than half of the tax year, with the exception of temporary absences. For example, the child is away at school.
- Joint return test. A married child cannot file a joint tax return unless the reason is to claim an income tax refund.
- Exclusive dependent test. Even if a child legally fits the guidelines as a qualifying child for more than one person, only one person or one married couple filing jointly can claim the child as a dependent. If you’re faced with this dilemma, you’ll have to pass the IRS tiebreaker rules before you can claim the child on your tax return.
Navigating Tiebreaker Rules
If you're the only person who can claim a child as a dependent, you're good to go when filing your tax return. But if the child is also a qualifying child for someone else, these tiebreaker rules determine which person can legally claim the child:
- The parents if they file a joint tax return.
- A parent, if the child qualifies for other non-parents.
- The parent with whom the child lived most of the time during the tax year, if two of the eligible people are the child's parents and the parents do not file a joint tax return.
- The parent with the highest adjusted gross income if the child lived with each parent an equal amount of time and the parents do not file a joint tax return.
- The person with the highest adjusted gross income if neither parent can claim the child.
Claiming the Child Tax Credit
Although the child tax credit is not a new benefit for taxpayers, it took a significant upswing with the passing of the Tax Cuts and Jobs Act of 2017. What began as a small $400 credit in 1998 is now worth five times more than that to qualifying taxpayers and their qualifying children beginning in 2018, 20 years after its debut. As an income-based benefit, you’ll be able to claim up to $2,000 as a tax credit on your income tax return for each qualifying child you can claim as a dependent. And even if you’re not required to file a return because you don't owe any tax, you can still receive up to $1,400 as a refundable credit.
Although you can claim your qualifying child as a dependent as long as she is younger than 19 years of age (or 24 if a full-time college student), your child must be younger than 17 for you to claim the child tax credit.
Child Tax Credit Income Limits
Taxpayers must have earned income from sources such as wages, salaries and tips to be eligible for the child tax credit. Unearned income, including Social Security benefits, dividends and retirement pay doesn’t count toward this credit. When you compute your tax liability, subtract a $2,000 credit for your eligible child from your tax liability. For example, if your tax liability is $5,000 – this is the amount of tax you owe – when you subtract your $2,000 credit, you’ll only owe $3,000 in taxes. In this example, although you will not receive a credit refund, you’ll receive a tax reduction.
If your earned income is very low, however – for example, $10,000 – you’ll likely not owe any taxes, so your eligible credit wouldn’t actually offer you any benefit because there's no tax liability to offset. But you can claim a refund by multiplying your earned income that’s greater than $2,500 by 15 percent. The result is the amount of a refundable credit, which the IRS caps at $1,400. For example, if your earned income was $10,000 and you claimed one child, you’re entitled to a refundable credit of $1,125. ($10,000 minus $2,500 multiplied by 15 percent.)
Taxpayers on the higher end of the wage-earning spectrum are subject to child tax credit limits, called phase-outs. This means that if you cross an adjusted gross income threshold, the amount of the child tax credit benefit is reduced. Phase-outs begin at earned income amounts that are greater than $400,000 for married couples who file joint tax returns. All other taxpayers are subject to the same phase-out threshold, which begins with earned income amounts of more than $200,000.
Filing the Correct Tax Form
In order to claim the child tax credit, you’ll have to complete Schedule 8812 (Child Tax Credit) and attach it to IRS Forms 1040 or 1040A (U.S. Individual Income Tax Return) or 1040NR (U.S. Nonresident Alien Income Tax Return). You won’t be able to file your return on Form 1040EZ because this form is for taxpayers who have no dependents. But beginning with the 2019 tax year (for tax returns you'll file in 2020), you'll be able to use only one 1040 form instead of having to choose between three possibilities. The IRS is combining the current 1040, 1040A and 1040EZ forms into one comprehensive form for simplicity.
Taking Another Tax Credit
Although the child tax credit is tailor-made for taxpayers with dependent children, there’s another credit that can also help ease the tax burden. The earned income tax credit benefits taxpayers with no children as well as taxpayers who have children. This credit helps lower the tax liability of taxpayers with low-to-moderate incomes. In some cases, similar to the child tax credit, taxpayers may receive a refundable earned income tax credit instead of a nonrefundable credit toward the taxes they owe.
The earned income tax credit is also similar to the child tax credit for another reason – it’s based on a taxpayer’s earned income instead of unearned income. A noteworthy exception is investment income, which is allowed, but which cannot be more than $3,500 during the tax year. The amount of your earned income tax credit is based on your filing status, your income and qualifying children, if any. If you’re married, you’ll have to file jointly with your spouse instead filing a separate return to receive the earned income tax credit. But even if you don't owe income tax and you're not required to file a return, you'll still have to file to claim your earned income tax credit refund.
Earned Income Tax Credit Income Limits
The IRS establishes eligibility requirements for the earned income tax credit at these income limits based on your filing status:
- Single, head of household or widowed. After calculating your earned income and your adjusted gross income, each of these amounts must be less than $40,320 (claiming one qualifying child), $45,802 (claiming two qualifying children) and $49,194 (claiming three or more qualifying children). As a comparison, taxpayers in these filing statuses who claim no children must have an income of less than $15,270 to qualify for the earned income tax credit.
- Married filing jointly. Your earned income and adjusted gross income totals must be less than $46,010 (claiming one child), $51,492 (claiming two children) and $54,884 (claiming three or more children). As a comparison, taxpayers in this filing status who claim no children must have an income of $20,950 to qualify for the earned income tax credit.
The IRS also establishes these caps on the maximum amount of earned income tax credit you can claim. As a comparison, taxpayers who claim no qualifying children can only claim $519.
- Claiming one qualifying child: $3,461
- Claiming two qualifying children: $5,716
- Claiming three or more qualifying children: $6,431
Even if you're an early filer who submits a tax return in early January in anticipation of a refundable credit, the IRS cannot issue your credit until mid-February.
Seeking Tax Advice
If you feel as though you’re lost in a maze of tax laws and filing requirements, you’re not alone. Recent changes in tax laws added even more details to an already robust list of eligibility requirements. Because the IRS recognizes the precise details of claiming tax credits, it requires tax professionals to submit IRS Form 8867 (Paid Preparers Due Diligence Checklist) when they calculate your child tax credit or earned income tax credit benefit to ensure they're in compliance with the most recent tax law changes. Their reputation is on the line because they're assessed a penalty of $510 for each failure to comply. To claim your highest tax credits and reduce your tax liability as much as possible, your accountant or tax attorney can help you maneuver through the details of filing your tax return.
Calling on the IRS
For qualifying taxpayers whose income is typically less than $54,000, the IRS offers free tax help through its Volunteer Income Tax Assistance program. Another free service is the IRS Tax Counseling for the Elderly program, which helps taxpayers of all ages, particularly those who are older than 60 years of age. Visit IRS.gov and search for these two programs to see if you qualify for free tax help with your child tax credit and earned income tax credit questions. You can also call 800-906-9887 to find the nearest Volunteer Income Tax Assistance or Tax Counseling for the Elderly location, which may be found at a nearby school, library or community center.
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