What is a Child Tax Credit?
The child tax credit is a tax-bill reduction given to people with qualifying children under 17 years old.
How Does a Child Tax Credit Work?
The Internal Revenue Service (IRS) allows taxpayers to reduce their federal income taxes by a fixed amount for each qualifying child. A qualifying child is a dependent under 17 who is a U.S. citizen or a resident alien. The child must be the taxpayer’s son, daughter, adopted child, grandchild, stepchild, eligible foster child, sibling, stepsibling, or descendant. The child must live with the taxpayer for more than one-half of the tax year. In many cases, divorced parents decide which parent receives the child credit.
The child tax credit is not a tax deduction, it is a credit. That means it is a dollar-for-dollar reduction in your tax bill rather than a reduction in your taxable income. As a result, the child tax credit is a very effective way to reduce a tax bill. The amount of the credit usually increases every year, and the income level at which the credit is phased out also changes every year.
In general, the more children a taxpayer has, the higher his or her tax credit is. For taxpayers with modified adjusted gross incomes (AGI) above a certain amount, the amount available from the tax credit is reduced. Taxpayers with a modified AGI over an even higher amount do not qualify for the tax credit at all (the income threshold varies with the number of children the taxpayer has). The amount of income or alternative minimum tax the taxpayer owes also limits the credit. For example, if you qualify for a $700 child tax credit but you only owe $200 in income tax, then your credit will probably be limited to $200.
Why Does a Child Tax Credit Matter?
The child tax credit can substantially reduce a person’s tax bill or increase his tax refund. It is important to note that if the credit produces a large federal tax refund, the taxpayer should consider revising his or her federal withholding form (form W-4) to avoid letting the IRS hold the taxpayer’s money all year.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
When you're faced with serious money sucks -- say, unemployment, a new home or the prospect of funding your child's college education -- it...Read More →
The cost of tuition has skyrocketed in the last 30 years. According to Bloomberg, college tuition fees have jumped more than 13-fold since...Read More →