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Many families with kids are getting some welcome, though temporary, tax relief with an increase in the Child Tax Credit (see footnote). The child tax credit is a reduction in your actual taxes, not just a deduction from your taxable income.
How Much Is the Child Tax Credit?
The Child Tax Credit increased from $500 for each qualifying child in 2002 to $1,000 for each qualifying child in 2003 and 2004, as long as you are within the income thresholds for your filing status. If the credit is more than your tax liability, you may be able to claim the difference as a refund. Use Form 8812, Additional Child Tax Credit, to calculate your additional credit.
Who is a Qualifying Child?
For purposes of the Child Tax Credit, a qualifying child is someone who:
- Was under the age of 17 at the end of 2004 (must have been born after 1988)
- Is your son, daughter, adopted child, grandchild, stepchild, or eligible foster child
- Is claimed as your dependent for tax purposes
- Is a U.S. citizen or resident
Who is Eligible for the Child Tax Credit?
Families earning between $27,000 and $110,000 are eligible for the credit. If your modified adjusted gross income is over the income threshold, your credit will be phased out based on how much your income exceeds the threshold.
What Are the Income Thresholds for the Child Tax Credit?
The income threshold at which the phase out of the credit begins is based on your filing status:
- Married Filing Jointly: $110,000
- Married Filing Separately: $55,000
- Other Filling Status: $75,000
The total credit (not the amount per child) is reduced by $50 for each $1,000 that your adjusted gross income exceeds the income threshold. For example, if you have three kids, your filing status is married filing jointly, and your income was $112,000, you exceeded the threshold by $2,000. Multiply three times $1,000 to get your initial credit before phase-out and subtract $50 times two. You will subtract $100 ($50 times 2) from your $3,000 ($1,000 times 3) credit, for a total eligible credit of $2,900.
How Do I Claim the Child Tax Credit?
To claim the Child Tax Credit, you must file on form 1040 or 1040A. You can't claim the credit on Form 1040EZ. For more information on how to calculate your credit, see IRS Publication 972, Child Tax Credit.
Footnote:
Congress, in its infinite wisdom, made the provisions of the Tax Reconciliation Act of 2003 effective only until 2011. After that, the changes in the 2003 tax law are up in the air. Congress also phased out some provisions over a certain period of time, after which they revert to the provisions of the Tax Act of 2001. The Child Tax Credit increased to $1,000 per eligible child for 2003 and 2004 and then reverts to the levels set by the Tax Act of 2001. All these changes will keep the nation's tax accountants employed, as Americans try to figure out which tax provisions are in place from one year to the next.
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