TAX TIP No. 8
All parents hope that their children will be a credit to them. That can literally be the case at tax time.
On 2008 returns, the credit could cut a parent's tax bill by $1,000. This same savings-per-child amount will continue through 2010. After that, congressional intervention will be required to maintain the break at the one-grand level, or it will revert to half that.Future congressional action or inaction, however, has no effect on another appeal of the child tax credit: There are no records to keep or extra forms to file to get it. It is claimed directly on your 1040 or 1040A form.
You will, however, have to fill out a work sheet to figure your exact credit amount. And if you're eligible for the additional child tax credit, there is even more paperwork involved.
Basic requirements
There are also certain tests you -- and your kids -- must meet before the Internal Revenue Service will let you claim the credit.First, each youngster has to be a "qualifying" child. This filing season, the Internal Revenue Service is utilizing a uniform definition of a child in connection with various tax credits. To qualify for the child tax credit, the youngster must fulfill several requirements.
To qualify, the child must be:
- Younger than 17 at the end of the tax year.
- Your child or sibling (either full or step) or a descendent of one of these relatives. The child can be yours by birth, adoption, or because he or she was placed in your foster care by a court or authorized agency.
- A U.S. citizen or resident.
- The child also had to have lived in your home for more than half the year and not have contributed more than half of his or her own support during that year.
The IRS also looks at how much income you have in providing for most of the child's care. If you make more than a certain amount, you won't get the full benefit of the credit.
The credit begins phasing out if you make $110,000 and are married, filing a joint return; earn $75,000 and file as head of household, single or qualifying widow or widower; or make $55,000 and are a married-filing-separately taxpayer.
And if you take other credits, they could affect the final amount of child tax credit that you can claim. Instruction booklets for both the 1040 and 1040A contain the work sheets you'll need to figure this credit. You also can find detailed examples in IRS Publication 972, Child Tax Credit.
Getting extra credit
One drawback of the child tax credit is that it is nonrefundable. That means it can help you erase your tax bill but it won't get you a refund.Take, for example, Jim and Joan, a couple with two kids who translate to a total child tax credit of $2,000. However, since Jim and Joan's tax bill is $900, they lose some of the tax benefit of the credit. They can use it to wipe out what they owe the IRS, but the other $1,100 is effectively lost.
But Joan, Jim and other filers in similar situations might be able to get all or some of that nonrefundable portion back via the additional child tax credit. The exact amount of this added credit generally is the smaller of the nonrefundable portion of the child tax credit or 15 percent of a filer's taxable earned income over an annually adjusted threshold amount. For 2008 returns, that threshold for calculating the additional child tax credit is $8,500.
For illustrative purposes, how it would work in Jim and Joan's case?
In Jim and Joan's case:
| 1. Begin with the couple's income: | $70,000 |
| 2. Enter the 2007 child additional child tax income threshold amount: | $8,500 |
| 3. Subtract line 2 from line 1: | $61,500 |
| 4. Multiply line 3 by 15 percent: | $9,225 |
Wait a minute. The additional child tax credit is not quite as lucrative as the $9,000-plus figure indicates. But it's not bad either. Jim and Joan now can claim the 15 percent figure ($9,225) or their total excess credit ($1,100), whichever is smaller. In this case, they get additional child tax credit for the $1,100 that originally was nonrefundable.
And parents with three or more children might be able to get back even more. In this case, parents could possibly get an additional child tax credit up to the amount of Social Security taxes paid during the year, less any earned income credit they received.
Of course, the additional credits, like most child-related duties, require extra time and work. To calculate your precise added tax credit, you'll have to complete a work sheet and fill out Form 8812 and send it along with your individual tax return.
But don't let the extra paperwork stop you. The calculations could really pay off.