Child Tax Credits: The tax benefits of parenthood

Posted On: October 30, 2018  0 Comments

Updated for Tax Year 2019. All changes expire December 31, 2025 unless renewed. Are you reaping all the tax benefits of being a parent (or a grandparent)? The Child Tax Credit, Earned Income Tax Credit, and the Child and Dependent Care Credit all make it a little easier when the tax return due date approaches.

Child Tax Credit

Following the Tax Cuts and Jobs Act of 2017, the Child Tax Credit has doubled and is worth up to $2000 per eligible child.

To be an eligible child, they must:

Have been under 17 on December 31, 2019
Have a valid Social Security Number (not a TIN)
Be a qualifying relation (your own, adopted, step, or foster child, your (step)brother, (step)sister, niece, nephew, or grandchild)
Have not provided more than half of their own financial support
Have been claimed as a dependent on your tax return
Be a U.S. citizen, national, or resident alien
Have lived with you for more than half the year (with some exceptions)

To claim the full credit, your modified adjusted gross income (MAGI) must be below $400,000 for joint filers or $200,000 for all other filers. For each $1000 of income above the threshold, the maximum credit is reduced by $50.

Previously the Child Tax Credit was non-refundable, and a separate refundable Additional Child Tax Credit came into play. These have essentially been merged, making the new Child Tax Credit partially refundable. If the credit will bring your tax liability below zero, for tax year 2019 up to $1,400 of the credit is refundable. The maximum refund you can receive from this credit is equal to 15% of your earned income above $2,500.

New Dependent Credit

A new $500 credit has been created for other qualifying dependents who do not meet the requirements for the Child Tax Credit, including dependent children age 17 or older, elderly parents, or disabled adult children.

A qualifying dependent must:

Be a qualifying relation you financially support (regardless of residence), or a non-relative that lives with you as a member of your household for more than half the year
Have been claimed as a dependent on your tax return
Have received over half of their support from you
Be a U.S. citizen, national, or resident alien
Have a valid SSN or TIN
Have a gross income of less than $4,200 (for 2019, adjusted annually for inflation)

Earned Income Tax Credit

The IRS estimates that a large percentage of people who are eligible for the Earned Income Tax Credit (EITC) don’t take it. Frequently these taxpayers are grandparents who are the primary caretakers of their grandchildren and are not aware that they can claim the credit.

To qualify, you must:

File a return, even if you are otherwise not required to do so
Have earned income for the year
Have been a U.S. citizen or resident alien for the entire year
Have valid social security numbers for yourself, your spouse, and any qualifying children
Not have investment income exceeding $3,600
Both your earned income and adjusted gross income (AGI) must be less than $50,162 if filing single or $55,952 if filing jointly with 3 or more children. Income limits are lower for fewer or no qualifying children.

If you have no qualifying children:

You or your spouse must be at least age 25 but under age 65 at the end of 2019
You and your spouse cannot be claimed as a qualifying child or dependent on somebody else’s return

The maximum credit for 2019 is $6,557 for taxpayers with 3 or more qualifying children. Special rules and restrictions come into play for individuals receiving disability payments, members of the military, or if another of the child’s family members also qualify for the EITC.

Child and Dependent Care Credit

You may be eligible for the Child and Dependent Care Credit if you paid care expenses so you could work.

Qualifying expenses include:

Summer day camp
After school care
Caretakers such as a housekeeper, nurse, or home care provider

You must furnish the Taxpayer Identification Number of the care provider, and it cannot be your spouse, the dependent’s parent, any of your dependents claimed on your return, or your own child age 18 or under.

The credit is a percentage of your allowed expenses (a maximum of $3,000 in expenses for one dependent or $6,000 for two or more). This percentage varies based on your income, ranging from 20%-35%. At its maximum possible value, the credit is worth $1,050 for one dependent and $2,100 for two or more. This credit may not be taken for expenses paid for with pretax dollars withheld by your employer for dependent care.

If you are saving for college or your child already is a college student check out the tax benefits of higher education.

Confused? That’s why you have us! Our professional tax preparation services mean we have it covered. We can walk you through the credits you may be eligible for at your tax prep appointment and answer any questions you have. Call 860-216-2195 to schedule your appointment.

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