Some of America's most effective social support policies work through the tax code. Programs like the Earned Income Tax Credit and the mortgage interest deduction have made life easier for millions of taxpayers, while the polite fiction of the payroll tax helped ensure political survival of Social Security and Medicare.
Among those success stories is the child tax credit, a policy that helps families with the costs of raising children.
And those costs are not small. According to the Department of Agriculture the average American family will pay more than a quarter of a million dollars raising a single child to age 18, a price tag that does not include college tuition. Finding child care and juggling employment can add even more to this number, putting a traditional family further and further out of reach for precisely the same young adult population already struggling with weak job opportunities and historic debt due to student loans.
A simple tax credit can't fix all of the problems of the cost of college and rising rents. But it can help at least a little bit. Here's how it works.
What Is the Child Tax Credit?
The child tax credit (CTC) was first enacted in 1997 and has been increased several times since then. It is a tax credit worth up to $2,000 per qualifying child, defined as a dependent who is under the age of 17 at the end of the tax year in question. It applies to most taxpayers.
As a tax credit the CTC directly reduces your total tax liability. This is different from a tax deduction which reduces your taxable income before taxes are calculated.
The child tax credit is a partially refundable tax credit. This means that if it reduces your tax rate below zero you can receive a portion of the credit as a payment from the IRS. (Note: This is not the same as an overpayment refund. When you receive a refund for paying too much in W-2 withholding the CTC will give a dollar-for-dollar increase to that refund.)
The child tax credit refund is equal to 15% of qualifying earnings above $2,500. The refund is capped at $1,400. As pointed out by the Tax Policy Center, because of this formula all parents who earn between $2,500 and $30,000 receive only partial assistance through the CTC.
Parents who earn less than $2,500 a year receive no assistance at all.
The child tax credit is only available to taxpayers with earned income of $2,500 or more. This does not include investment income, public assistance or unemployment benefits.
It begins phasing out for taxpayers who earned $200,000 Single Filer/$400,000 Joint Filer. At $280,000 Single Filer/$480,000 Joint Filer the household receives no child tax credit.
Child Tax Credit Examples
To see how the child tax credit works in practice, we'll take a look at two case examples. (Note: These examples bear no relationship to actual tax brackets. Numbers have been chosen for ease of demonstration.)
Richard earned $75,000 last year and has a tax bill of $10,000. He paid $12,000 in withholding over the course of the year. He has two qualifying children. In this case, the child tax credit would kick in. Richard makes less than the threshold for phase-out so he would receive the full $2,000 credit for each child. He receives a $4,000 tax credit in total, reducing his taxes owed to $6,000. Since Richard already paid $12,000 over the course of the year he will now receive $6,000 back from the government.
Richard earned $12,000 last year. He owes nothing in taxes and paid nothing in federal income tax. He has one qualifying child. In this case the child tax credit's limited refund would kick in. Richard makes more than the minimum requirement, so he would be eligible for the full $2,000 credit. However, he does not have any income tax to reduce. Instead, Richard will receive a partial refund. This is calculated as follows:
$10,000 - $2,500 = $7,500;
$7,500 x 0.15 = $1,125
Richard is too poor so he will only get partial assistance: $1,125.
Child Tax Credit vs. Child Tax Exemption
The child tax credit is not the same thing as the dependent exemption.
Historically the dependent exemption allowed taxpayers to take a tax deduction for each qualifying dependent, including children. This was worth approximately $4,050 per dependent. As a deduction, the exemption allowed you to take this money off of your taxable income before calculating final taxes owed.
Starting with 2018 taxes (those due April 15, 2019) the dependent exemption has been suspended. Instead, taxpayers can qualify for the child tax credit.
How to Qualify for the Child Tax Credit
To qualify for the tax credit, your child must meet the following requirements:
- You must have claimed them as a dependent.
- They must be your child or you must be their legal guardian. Note that related children such as siblings and cousins will qualify for this credit as long as you are their guardian and claiming them as a dependent on your taxes.
- They must have been 16 years old or younger at the end of the tax year in question.
- They must have lived with you or in your care for at least half the year and must have provided no more than half of their own financial support during this time.
- They must be a legal U.S. citizen, national or resident.
- They must have had a Social Security number in the year for which they are being claimed.
Changes for 2018 Taxes
Congress has made several changes to the child tax credit for 2018 taxes. In addition to using this credit to replace the dependent exemption entirely, other changes include:
- The cap for the credit has increased. It was previously $1,000.
- More of the child tax credit has been made refundable. Previously the refund was handled separately from the credit and was smaller.
- Taxpayers can now claim the credit at $2,500 of earned income. Previously the refund threshold was $3,000.
- The Income for Other Dependents Credit has been added. This is a related tax credit which is worth $500 for each non-child dependent which you claim.
- The requirement that the child have a Social Security number has been added.
- The phase out thresholds have been increased. The purpose of the CTC has historically been to help struggling families. As a result, prior to tax year 2018 the credit began phasing out at $75,000 Single Filer/$110,000 Joint Filer. Starting with tax year 2018 the credit begins phasing out at $200,000 Single Filer/$400,000 Joint Filer.
While families earning almost a half a million dollars per year can claim this credit, those who earn nothing at all cannot. A taxpayer must have earned at least $2,500 in order to qualify for the tax credit and cannot receive the full value of this credit until they earn at least $30,000.