The child tax credit is worth up to $1,000 for each qualifying child. This credit is unique in that it can be both a nonrefundable and a refundable credit, and it’s the only tax credit that’s treated this way. The refundable portion of the child tax credit is called the additional child tax credit.
You can claim the Child Tax Credit for all of your qualifying children.
A qualifying child for purposes of the Child Tax Credit must be all of the following:
Under age 17 at the end of the year.
Younger than you (or your spouse) or disabled.
A citizen or resident of the United States.
Someone who lived with you for more than half of the year, or who lived apart due to divorce or separation and for whom you are entitled an exemption.
Your:
Son, daughter, adopted child, stepchild, or a descendent of any of them (for example your grandchild).
Brother, sister, stepbrother, stepsister, or a descendent of any of them (for example, your niece or nephew).
Foster child placed with you by an authorized placement agency.
The parent who claims the child as a dependent is eligible to claim the child tax credit. This is true even if the parent’s filing status is married filing separately.
When your income rises above a certain level, the child tax credit begins to phase out. The amount is reduced $50 for every $1,000 (or portion of $1,000) that your modified adjusted gross income (AGI) exceeds:
$75,000 if you’re filing a single, head of household, or qualifying widow(er) return
$110,000 if you’re filing a joint return
$55,000 if you and your spouse file separate returns
For the purpose of this credit, modified AGI consists of adjusted gross income plus foreign earned income, if any.
Example: You and your spouse have one qualifying child and an AGI of $119,000. Since your income exceeds the $110,000 limit by $9,000, the amount of your child tax credit will be reduced by $50 for every $1,000 that you exceed the limit:
9 X $50 = $450 (Amount the credit must be reduced)
$1,000 (Child tax credit amount) -- $450 (Reduction amount) = $550
The total amount that you can claim is $550.
Note: The $50 reduction applies fractionally by the thousand, meaning that $119,001 would be treated as being $10,000 over the married filing jointly phaseout limit. Thus, in the above example you would have to multiple $50 by 10 to determine the amount that must be subtracted from $1,000. Thus, you would be entitled to $500 ($1000 - $500) in credit calculated as follows: $1000 – (10 x $50) = $500.
No portion of the child tax credit can be carried over to future years. To maximize the benefit of each credit, nonrefundable credits must be taken in a specific order. For this reason, other credits must sometimes be computed first to properly apply the child tax credit.
If your child tax credit is limited, you might be eligible to claim the additional child tax credit. To qualify for the additional child tax credit, 1 of the following must be true:
Your earned income must exceed $3,000 (for 2010); or
You must have 3 or more qualifying children.
If you have at least 1 qualifying child, you can claim a credit of up to 15% of the amount that your earned income exceeds $3,000. If you have 3 or more qualifying children, you can claim a higher credit if the net Social Security and Medicare tax that you paid exceeds the Earned Income Credit (if any).
Example: Taxpayer is eligible for the child tax credit of $1,000 for their qualifying child. The taxpayer’s earned income for the year is $7,000 and the tax liability for the year is $0. The taxpayer may claim the additional child tax credit of $600 (($7,000 - $3,000) x 15%).
In all cases, the credit is limited to $1,000 per qualifying child, and is reduced by the nonrefundable portion of the child tax credit.
For the purpose of the additional child tax credit, earned income always includes combat pay. Because having more earned income increases the additional child tax credit, it’s always taken into account.
Use Form 8812 to compute the additional child tax credit.
For more information, see Publication 972: Child Tax Credit.