Child Tax Credit – Definition

Cite this article as:"Child Tax Credit – Definition," in The Business Professor, updated September 17, 2019, last accessed October 20, 2020, https://thebusinessprofessor.com/lesson/child-tax-credit-definition/.

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What is the Child Tax Credit?

The Child Tax Credit refers to a type of credit given to a taxpayer for his or her qualifying child dependent. The child tax credit is given to the taxpayer at the end of every year. The child must be below 17 years to qualify as a dependent. Basically, a child tax credit reduces a taxpayer’s federal income tax bill.

For instance, in 2018, the CTC reduced the taxpayer’s federal income tax by $2,000 per child. It other words, it is a form of tax relief for taxpayers who have qualifying child dependent.

A Little More on What is a Child Tax Credit

Generally, CTC is meant to boost the income of those custodians with children and other dependents under their care. The minimum amount of the CTC per child is $2, 000. Nonetheless, the final amount you can get will depend on the level of your income.

To be eligible for the CTC, the taxpayer must have received an income of $2,500 and above. For those filing single returns, their CTC eligibility phases out when their income hits above $200,000. For joint tax filers, their CTC qualification phases out when their income hits $400,000. Where your income exceeded the set threshold, then you are set to qualify for only partial credit and not full.

It is important to note that CTC is different from a tax deduction. While tax deduction reduces the amount of your taxable income, the CTC simply reduces the total tax bill owed to the IRS. So, basically, the CTC is deducted from what has been computed as your total tax bill. A tax deduction is deduction done to your income before it is subjected to taxation.

 How Child Tax Credit Works [Example]

There is a direct reduction of the amount the taxpayer owes the Internal Revenue Service (IRS). Let’s assume that a taxpayer’s tax bill is $3,500 and he or she is eligible for $2, 000 in tax credits. In this case, his or her tax bill will be $1,500. This means that the CTC will reduce the tax bill down to $1,500.

 Dependents Eligible for the Child Tax Credit

The eligibility of dependents for CTC is based on several factors. Basically, they must pass the following tests to be able to qualify as dependentS:

 

  • Age Test 

 

The dependent must have been below 17 years when the end-year tax return was being filed.

Relationship Test

The child you are claiming as your dependent should be either of the following:

  • Daughter/Son
  • Stepchild/Foster child
  • Brother/sister
  • Stepbrother/sister
  • Half-brother/half-sister
  • Grandchild
  • Nephew/niece

 Support Test

In order to qualify, over half of the financial support of the dependent must not have come from the dependent himself. In other words, the financial support provided by the child himself must not be equal or more than that of the custodian.

Resident Test

The child must have stayed with you for over 6 months for you to claim him or her as your dependent. If your dependent is temporarily absent from your custody, it is still considered that you lived with the child. Special circumstances may include:

  •  A child being away to attend school
  • A child being away on vacation
  • A child under medical care away from home
  • A child being detained in a juvenile facility

Dependent Test

You must have claimed the child as your dependent on the federal tax return.

Citizenship Test

The child must either be a U.S. national, a U.S. citizen, or a U.S. resident alien. Also, a child must have a social security number. Note that a U.S. national refers to children born in either of the following places:

  • American Samoa
  • Commonwealth of the Northern Mariana Islands

 Required Documents to be able to Claim CTC

There are several documents you are required to submit when claiming CTC. They include the following:

  • National insurance number.
  • A document with proof of your identity. This may include a driving license or a birth certificate.
  • A document that acts as a proof of your annual income. This may include payslips, P60, or bank statements.

In the case of two-child limit exception, you may be required to submit the following documents:

  • Adoption certificate.
  • Declaration document from a support worker confirming the child is actually a product of rape.
  • Declaration document from a social worker confirming kinship care replacement.

Additional Child Tax Credit

Additional CTC refers to a refundable credit created to support families with children not less than three. It also applies to those qualifying individuals who had not owed enough taxes that qualified them to get full credit owed to them.

To receive the credit, the family claiming it must have earned an income of not less than $3,000. Note that this additional CTC is now refundable under CTC. The Refundable limit as set by the IRS amounts to $1,400 per child.

Reference for “Child Tax Credit”

https://www.investopedia.com/terms/c/childtaxcredit.asp

https://www.taxpolicycenter.org/briefing-book/what-child-tax-credit

https://investinganswers.com/financial-dictionary/tax-center/child-tax-credit-2108

https://www.turn2us.org.uk/Benefit-guides/Child-Tax-Credit/What-is-Child-Tax-Credit

https://www.litrg.org.uk/tax…/tax-credits-and-benefits/tax-credits/what-child-tax-credit

https://www.efile.com/do-i-qualify-for-the-child-tax-credit-who-is-eligible/

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