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Make the Most of the Child Tax Credit

This year, the economic stimulus package is tied to the popular credit.

A popular tax credit is getting renewed attention this filing season because it's a key component of the economic stimulus payment.

By now, every parent has heard that their children might entitle them to an additional $300 apiece when the payments, or rebates as they are popularly called, are calculated. But some parents have discovered a distressing fact about their kids' tax-rebate eligibility.

Only youngsters that qualify for the Child Tax Credit count toward the stimulus bonus. That essentially rules out most college kids and some high schoolers.

To ensure that you get all that you are entitled to as far as child-related rebate money, here's a look at how the Child Tax Credit works.

Credit vs. Deduction

First, as the name says, it's a credit, which is a much more valuable tax break than a deduction. While a deduction will reduce your taxable income and thus could lower your tax bill, a credit counts directly toward that bill itself.

The $1,000 per child tax credit means that if you have a $1,500 tax bill, it drops to $500. As a deduction, that $1,000 would get taxpayers in the 25% tax bracket only half that much in tax savings.

The one drawback to the Child Tax Credit is that it is nonrefundable. That means it can reduce your tax bill to zero -- you owe $1,000 and have a $1,000 credit -- but it will not get you money back from the IRS. If you owe only $500, your $1,000 credit will eliminate your tax liability but you lose the other $500.

Children's Requirements

In order to claim $1,000 for each of your children, the youngsters must meet certain qualifications. Each eligible child must be:

  • 1. Your son or daughter, by birth or adoption, or a stepchild or foster child. Siblings, either full or step, also qualify, as do descendants, such as grandchildren, nieces and nephews;
  • 2. age 16 or younger at the end of the tax year;
  • 3. dependent upon you for over half of his or her own support during the tax year;
  • 4. a resident in your home for more than half of the tax year. Temporary absences for special circumstances (e.g., school, vacation, medical care, military service, or detention in a juvenile facility) count as time lived with you;
  • 5. a U.S. citizen, a U.S. national or a U.S. resident alien. If you adopted your child and you are a U.S. citizen or national, the child meets the citizenship requirement as long as he or she lived with you for the full tax year.

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Parents' Requirements

Parents also have some hurdles to clear, the biggest one for many parents being the income limitation.

If your modified adjusted gross income, or MAGI, is above a certain amount, the credit amount will be reduced and possibly eliminated. In this case, your MAGI is figured by taking your adjusted gross income (the amount shown on line 38 of Form 1040; line 22 of Form 1040A; line 36 of Form 1040NR) and adding back certain other credits or income exclusions. These generally are exclusions from income based on foreign earned income or income from the U.S. territories of Puerto Rico and American Samoa.

If you do not have any of the above, your MAGI is the same as your adjusted gross income. In either case, if that amount exceeds (for the 2007 tax year) the following limits, your Child Tax Credit is reduced:

  • $110,00 for married filing jointly taxpayers,
  • $75,000 for single filers, and
  • $55,000 for married taxpayers who file separate returns.

Claiming the Credit

Once you and your children meet the eligibility standards, claiming the Child Tax Credit is easy.

You simply file your return. The only restriction here is that you must file either Form 1040, 1040A or 1040NR; you cannot claim the credit on the simplest 1040EZ or 1040NR-EZ forms.

In some cases, the Child Tax Credit can be claimed for a qualifying child who otherwise is not a dependent and therefore is not listed on the tax return; for example, the taxpayer who has the "qualifying child" is a dependent of another taxpayer. In these cases, Form 8901 must be completed and submitted along with the 1040.

Regardless of the form, be sure to include your children's tax identification numbers on the return. Without that information, the credit is automatically disallowed.

Additional information, examples and sample worksheets can be found in

IRS Publication 972, Child Tax Credit.

Kay Bell, a freelance writer and editor in Austin, Texas, has been writing about taxes for the last decade. She has two tax blogs, Don't Mess With Taxes and Eye on the IRS.