Raising children can be a pretty challenging experience, especially for lower income earning parents. As a result, with parents dealing with finances and taxes, the United States creates an avenue to assist parents with taxation and raising their offspring through the child tax credit.
Therefore, if you live in the United States, this blog post has you covered concerning what CTC is and how to claim it. Read on to learn more.
What is Child Tax Credit?
The child tax credit (CTC) is a tax credit offered by the government of various countries, designed to assist parents who have kids depending on them. The CTC provides relief for taxpayers based on the number of dependents they have and their income level. For instance, in the United States, the child tax credit is open to only families that make less than $400,000 every year.
If you are an entrepreneur or employee resident in the United States, then you should know that qualifying for the CTC is income dependent. As a result, if you earn below $2,500 per year, you will not qualify to lay claims to the child tax credit according to US policy. Therefore, as an entrepreneur, you might want to optimize your income and expenses by adopting online invoices and pay stubs provided by Paystubsnow. They can help to automate your business process and save cost on paper financial documentation.
The American Rescue Plan Act of 2021 considerably enhanced this credit, which was designed to assist taxpayers in supporting their families, for 2021 taxes.
The Child Tax Credit reduces taxpayers’ tax liabilities dollar for dollar. The American Rescue Plan raised the maximum yearly credit from $2,000 per kid (under the age of 17) in 2020 to $3,000 per child (under the age of 18) or $3,600 (children under the age of 6) in 2021, making the 2021 credit fully refundable.
Furthermore, beginning in July 2021, the Federal Revenue Service (IRS) will send the Child Tax Credit to qualifying taxpayers in monthly advance installments.
Factors affecting child eligibility for a CTC in the United States
In the US, according to the IRS, over 36 million families may be qualified for the CTC in 2021 as part of the American rescue plan Act, 2021, and estimated at approximately $2,000 per qualified dependent. Therefore, before your child becomes a worthy candidate for a CTC, a few criteria qualify them as duly eligible. Here are some of such qualifying factors.
A valid Social Security Number
Before your child is eligible for a CTC, they must have a valid social security number. The social security number helps to provide factual data on the Child. It is essential to note that if a child only has an ITIN, they will not qualify for the CTC.
The age of the Child
The CTC is only available to children under 17 by the last day of the tax year (December 31st). Essentially, it means that if your child turns 17 on the previous day of the current year, such a child will be disqualified for the child tax credit.
The Child’s nationality
The eligible Child must be a legal national of the country within which they hope to benefit from the child tax credit.
Child expenses
Since the CTC is designed to support families, an eligible Child should not provide more than half of their support. Examples of child personal support include but are not limited to accommodation, feeding, clothing, education, healthcare, etc.
Adult supervision
Only children with direct adult supervision will qualify for the CTC. As a result, your child must be living with you for at least half of the year. Also, you will need a valid document like a lease copy or school records to serve as evidence.
However, there are a few considerations under which an exception can be granted, such as if the child was:
- Away on medical care.
- Schooled away from home.
- Served in the military.
- Away from home when you had a divorce or separation from your spouse, etc.
Child-Adult relationship
Only children who bear a familial relationship that is legally recognized will be qualified for a CTC. Examples of such familiar relationships include son/daughter, legally adopted/foster Child, dependent sibling/half-sibling, etc.
Benefits of CTC
The child tax credit was designed to aid many American families in financial commitment to their children, especially with the recent economic upheaval experienced by many families due to the global COVID-19 pandemic, where loads of parents lost their jobs due to the worldwide crisis. Here are a few of such benefits of the CTC.
- Reduction in federal tax by about $1000 per qualified dependent.
- The tax credit is fully refundable.
- Low-income families qualify regardless of their earning capacity.
How to claim Child Tax Credit (CTC) in the United States
Claiming your child tax credit in the United States does not require any elaborate procedure other than filing your taxes appropriately. Your federal income tax return is enough, and you will need the name and social security number for every qualifying child on your tax return. Also, your child must pass all other eligibility requirements as stipulated by US policy.
Top 6 Child Tax Credit Requirements for 2023, 2022, and Previous Tax Years:
Age test
For certain tax years, a kid must have been under the age of 17 (i.e., 16 or younger) at the end of the tax year for which the credit is claimed.
Relationship test
The kid must be your own, a stepchild, or a foster child who has been placed with you by a court or an approved organization. An adopted child is always handled as if he or she were your biological child. (“An adopted kid” includes a child who has been lawfully placed with you for legal adoption, even if the adoption has not been finalized by the end of the tax year.) You can also claim your sibling, stepbrother or stepsister. You can also claim descendants of any of these qualified persons, such as nieces, nephews, and grandkids, if they fulfill all of the other requirements.
Support test
The kid cannot have given more than half of his or her own financial support throughout the tax year to qualify.
Dependent test
You must declare the child on your tax return as a dependent. Your child must:
- be your biological or adopted kid, brother, niece, nephew, or grandchild.
- be under the age of 19, or under the age of 24 and enrolled full-time for at least five months of the year; can become permanently crippled at any age.
- having lived with you for more than 6 months
- have given no more than half of their own support for the year.
The kid must be a U.S. citizen, a U.S. national, or a U.S. resident alien to pass the citizenship exam.
Residence test
The kid must have resided with you for more than half of the tax year for which the credit is claimed. However, there are several notable exceptions:
- A kid born (or died) during the tax year is regarded to have lived with you throughout the year.
- Temporary absences from school, vacation, business, medical care, military duty, or imprisonment in a juvenile institution by you or the kid are considered as time the child resided with you.
- Children of divorced parents are likewise exempt from the residence requirement. See the Form 1040 instructions for further information.
Family income test
The Child Tax Credit is decreased if your modified adjusted gross income (MAGI) exceeds specific thresholds established by your tax filing status:
The phaseout of the credit begins at $200,000 in income ($400,000 for couples filing jointly) for tax years 2022 and 2018 through 2020.
- The phase out barrier for married couples filing separately in 2017 is $55,000; $75,000 for single, head of household, and eligible widow or widower taxpayers.
- $110,000 for married couples filing jointly. Your potential child tax credit is decreased by $50 for each $1,000 of income above the threshold.
FAQS:
Is child tax credit based on your income?
The IRS uses your tax returns of previous years or information you provided in the IRS non-filer tool to work out your monthly payment. Therefore, your child tax credit payment will be based on your income, Child’s age, and the number of dependents that you have under your care.
Do I get Child benefit for my third child?
If your third Child is born as part of multiple births, then you can get an extra universal credit and child tax credit. However, if your child is an addition to a set of previous children that you have, it leads to an exception.
What is the difference between a working tax credit and a child tax credit?
Working tax credit concerns working-class people with low incomes and is calculated based on your working hours and pay. At the same time, the CTC supports families that have kids until 16 years but not more than 20 years.
Is a Child tax credit the same as a child benefit?
The child tax credit does not depend on child benefit and is available to all whether or not you are working. It is paid by HMRC to support families with kids and is open to many parents.
