Can You Take the Child Tax Credit or Other Tax Breaks?
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The Child Tax Credit and other tax breaks can greatly cut the cost of raising your child, which can easily top $200,000 by the time he or she is 17.
A trifecta of federal tax credits — the Child Tax Credit, the Child and Dependent Care Credit, and the Earned Income Tax Credit — are among the most effective ways to reduce your tax bill. These credits reduce your tax bill on a dollar-for-dollar basis; one can even result in a refund once your tax liability is reduced to zero.
You’ll typically have to fill out a series of worksheets to see whether you qualify for each credit and how much the credit might be. Most online tax preparation software will lead you through the process and calculate the credits for you.
You can claim these credits using either Form 1040 or Form 1040A. You can’t use Form 1040EZ.
The Child Tax Credit for the 2016 and 2017 filing years offers up to $1,000 per child 16 or younger at the end of the calendar year (so, the child has to be 16 or younger by Dec. 31, 2016, if you want to take the credit when you file your tax return in 2017). You can take full advantage of the credit only if your modified adjusted gross income is under:
- $110,000 for married filing jointly
- $55,000 for married filing separately
- $75,000 for single or head of household.
Other eligibility requirements for the Child Tax Credit include:
- You must claim the child as a dependent on your return.
- The dependent child must be your biological child, stepchild, foster child, adopted child, brother, sister, stepbrother, stepsister, or any of their children (i.e., grandchild, nephew, etc.).
- You must have provided at least half of the child’s support during the last year, and the child must have lived with you for at least half the year (there are some exceptions to this rule).
- The child cannot file a joint return (or files it only to claim a refund).
- The child must be a U.S. citizen, a U.S. national or a U.S. resident alien.
The Child Tax Credit is not refundable; that is, it can reduce your tax bill to zero but you can’t get a refund on anything left over. Some families may qualify for the Additional Child Tax Credit, which is partially refundable, up to 15% of earnings over $3,000.
The Child and Dependent Care Credit offers tax relief if you had to pay for someone to take care of your child or other dependent while you worked or looked for work. Generally, it’s 20% to 35% of up to $3,000 of daycare and similar costs for a child under 13, an incapacitated spouse or parent, or another dependent so that you can work (and up to $6,000 of expenses for two or more dependents). It also is not refundable.
If you plan to claim the credit, the child or dependent needs to meet the IRS’ criteria. A dependent child, for instance, must be age 12 or younger at the time care is provided.
Spouses and other dependents don’t have an age requirement, but IRS rules say they must have been physically or mentally incapable of self-care and also must have lived with you for more than half the year.
Other requirements for claiming the credit:
- If you’re married, you must file as married filing jointly.
- You must have earned income — money you earned from a job. Investment or dividend income doesn’t count.
- You must provide the care provider’s name, address and Taxpayer Identification Number — either a Social Security number or an Employer Identification Number.
Unlike the Child Tax Credit discussed previously, your income doesn’t have to fall into certain parameters to claim the credit. You’re allowed to claim a percentage of your allowable expenses, ranging from 20% to 35%. Although the percentage of allowable expenses decreases for higher income earners — and therefore the value of the credit also decreases — it never disappears completely.
You can’t claim the credit for payments to care providers who are:
- Your spouse
- A parent of the dependent child
- A dependent listed on your tax return
- Your child who is age 18 or younger, even if they’re not listed as a dependent on your return
When filing for this credit, keep in mind that qualifying expenses go beyond physical care and extend to household expenses such as paying someone to help with cooking and cleaning.
Some states offer their own versions of the Child and Dependent Care Tax Credit. While the state versions of the credit are often structured as simply a percentage of the federal credit, your state’s revenue code could expand eligibility, adjust the income thresholds or provide other incentives specifically targeted at working families.
The Earned Income Tax Credit is a credit specifically designed to benefit working people with low incomes. You have to file a tax return to get it, even if you don’t owe tax and are not legally obligated to file a return.
This tax credit is one of the few that can become refundable if the credit exceeds the tax liability. So if you’re due to receive a credit of $5,000 but you owe only $2,000 in taxes, you can get a check for $3,000.
Those with the lowest incomes qualify for the largest credits. The credit phases out as you earn more money. The table below shows both the maximum credits and the maximum amount you can earn before losing the benefit.