Disclaimer: I am not a certified public accountant, nor am I affiliated with the Internal Revenue Service (IRS) in any way. My reason for writing this article is to provide taxpayers with hope of navigating a tax burden while struggling with the costs of raising children.
The federal government has four tax credits designed to help families with the cost of raising qualified children, such as:
- Child Tax Credit (CTC) and Advanced Child Tax Credit (ACTC): The CTC is a non-refundable tax credit that allows people with a qualifying child to reduce the amount of federal income tax they owe. If the CTC reduces your tax liability to zero while you still have some credit left over, you might be eligible for the ACTC. The ACTC is a refundable tax credit for each qualifying child for whom a person receives less than the full amount of their CTC. The refundable part of this tax credit is worth up to $1,700 for each qualifying child. Note: The maximum amount of the CTC and the refund of the ACTC per qualifying child are subject to change each year. Refer to the IRS for this year’s amount.
You may claim these credits, even if you do not ordinarily file a tax return. However, the credit is not allowed if you or your spouse (if filing a joint return) file a Form 2555 or Form 2555-EZ (excluding foreign-earned income).
Here are the general requirements for the taxpayer:
- You must generally file as Single, Head of Household, or Married Filing Separately. (Special exceptions allow filing a joint return only to claim a refund of withheld or estimated taxes).
- You must be a U.S citizen or a U.S. resident alien.
- You must have a valid Social Security Number for employment and have it issued before the due date of your tax return (including extensions).
Your qualifying child must also meet these requirements:
- Must be under 17 at the end of the tax year.
- Have not provided more than half of their own support for the tax year.
- Have lived with you for more than half of the tax year. And
- Must be claimed as a dependent on your tax return (son, daughter, grandchild, stepchild, half-sibling, stepsibling, niece, nephew, or eligible foster child).
Note: The CTC and ACTC begin to decrease in value if your AGI exceeds $200,000 ($400,000 for married couples filing jointly).
- Credit for Other Dependents (ODC): If you have dependents who are unable to be claimed for the CTC or the ACTC, you might be eligible for the ODC, which is a non-refundable tax credit available for each qualifying dependent. The maximum credit amount for each qualifying person is $500. However, the credit begins to decrease in value if your AGI exceeds $200,000 ($400,000 for a married couple filing jointly).
Here are the following requirements for dependents for the ODC:
- They must be dependents claimed on your tax return.
- They must be dependents who cannot be claimed for the CTC or ACTC.
- They must be a United States citizen or a United States resident alien.
They must have either of the following numbers issued before the due date of the return (including extensions): Social Security Number (SSN), Individual Taxpayer Identification Number (ITIN), or an Adoption Taxpayer Identification Number (ATIN).
- Child and Dependent Care Credit (CDCC): You may be eligible for this credit if you are paying for a daycare, preschool, a nanny, or a babysitter to care for your dependent child while you are working, looking for work, or attending school. This credit is calculated based on your income and a percentage of expenses you incurred for the care of qualifying persons to enable you to go to work, look for work, or attend school. The maximum costs you can use for this calculation are $3,000 for one qualifying person or $6,000 for two or more qualifying persons.
You may be eligible to claim the CDCC if you paid expenses for the care of a qualifying individual to enable you (and your spouse, if filing a joint return) to work or actively look for work. You (or your spouse, if filing a joint return) must also have lived in the United States for more than half of the year—special rules apply to military personnel stationed outside the U.S.
The following dependents must qualify you for the CDCC and must live with you for more than half of the year:
- A dependent under 13.
- A spouse or dependent of any age incapable of self-care.
Sources:
- https://www.irs.gov/tax-professionals/eitc-central/what-you-need-to-know-about-child-tax-credits
- https://www.irs.gov/credits-deductions/individuals/child-and-dependent-care-credit-information
—Kenneth Sullivan