The Child Tax Credit: What You Need To Know

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Are you a new parent? Here’s a baby present.

You know that a tax credit is worth more than a tax deduction. That’s because the credit is a dollar for dollar offset to tax. The Child Tax Credit allows you to reduce your Federal income tax by up to $1,000 per child, and there is no limit to the number of children, as long as they are under 17 at the end of the year, living with you more than six months (excluding newborns), and a US citizen. So, if you have one child, your tax bill can be reduced by $1,000; triplets? $3,000! So why not think about increasing your family size next year, and the year after? This credit is limited to those with certain incomes, of course.

This credit was first talked about in the early 1990s. Like most other adjustments to income in the tax code, it was put through as social legislation. The size of families were increasing, due to the prosperity that President Reagan created, but there was no adjustment in the amount of the personal exemptions for the number of children, so families were having a tough time paying taxes.

Congress’ answer: Reduce taxes with credits. In 1995, the discussions showed that over 28 million families would benefit by the program, and increase the spending power of those families by $22 million a year (in the aggregate). The credit would significantly benefit the vast majority of (blue collar) working class Americans.

The original allowance in the tax act of 1997 was $400 per qualified child, and increased to $500 the following year to $600 in 2001, then $700, and now to $1,000 as of 2009. In 2013 it is schedule to be reduced to $500 per child. The earlier legislation also made the tax credit available for families with fewer than three children.

Like other credits, there are income limitations and phase-outs. The full credit is reduced when income reaches:

• $55,000 for married couples filing separately,
• $75,000 for single, head of household, and qualifying widow(er) filers, and
• $110,000 for married couples filing jointly

If your credit exceeds your income tax, the balance may be refundable. For 2012, the child credit is refundable to the extent of the greater of:

• 15 percent of earned income above $3,000 (same as for 2011), or
• for taxpayers with three or more qualifying children, the excess of the taxpayer’s social security taxes for the tax year over his earned income credit for the year

But, if you have too many children, this credit will be reduced by another social tax, the Alternative Minimum Tax.

If you do not have a Social Security Number and are not authorized to work in the US, you are given an Individual Taxpayer Identification Number (ITIN). Although you are not allowed the Earned Income Tax Credit or most federal public benefits, you can collect the refundable portion of this credit. Last year, unauthorized workers received $4.2 billion in tax credits. In fact, 72 percent of tax returns using the ITINs claimed the child tax credit.

Here’s the report [PDF].

And what does IRS say: “The law has been clear for over a decade that eligibility for these credits does not depend on work authorization status or the type of taxpayer identification number used. Any suggestion that the IRS shouldn’t be paying out these credits under current law to ITIN holders is simply incorrect. The IRS administers the law impartially and applies it as it is written. If the law were changed, the IRS would change its programs accordingly. Despite our disagreement over the correct application of the tax law, the IRS appreciates the targeted program recommendations made by TIGTA, and it will continue to analyze potential improvements to our programs.”

What do you think?

Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.