What is the Child Tax Credit?

The Child Tax Credit is a credit worth up to $1,000 for each qualifying child. If you have 4 children, the credit can cut your tax bill by up to $4,000. Remember, a credit offsets your tax bill dollar for dollar. A child must meet 5 criteria for you to receive child-related tax benefits. He or she:

  • must be your dependent son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of them. He or she must be claimed as a dependent on your tax return.
  • must be younger than 17 at the end of the year. He or she must also be younger than you (and younger than your spouse if Married Filing Jointly). He or she must not have filed a joint return with his or her spouse unless that return was filed only as a claim for refund.
  • must not have provided more than half of his or her own support.
  • must live with you more than half the year (a child born during the year is considered to have lived with you the whole year).
  • must be a U.S. citizen, U.S. national or resident of the U.S.

Child Tax Credit for Individuals with Higher Incomes

The Child Tax Credit is available regardless of your filing status. However, your credit is reduced if your modified adjusted gross income (MAGI) is more than:

  • $110,000 if Married Filing Jointly
  • $75,000 if Single, Head of Household or Qualifying Widow(er)
  • $55,000 if Married Filing Separately

For every $1,000 (or fraction of $1,000) your MAGI exceeds the trigger point, you lose $50 of credit.

For example, if you file a joint return and your MAGI is $115,000, the extra $5,000 exceeding the limit would reduce your credit by $250. So if you have only 1 qualifying child in 2008, your credit would be $750. If you have 3 qualifying children, your credit would be $2,750 ($3,000 minus $250).

Social Security Card for Newborn
Remember to apply for a social security card promptly after your child's birth. The social security number is necessary to get some of the tax breaks to which you are entitled. If nothing else, not having it may cause delays in the processing of your return. To apply for a social security number, file Form SS-5.

Gifts for Your Child
Generally, gifts to your child do not count as taxable income, and you won't have to file a tax return on his or her behalf if your child's income is $950 or less. However, any earnings returned on gifts/investments given to your child are usually taxable (although it may be at the child's rate, which is usually lower than yours). If your child is unmarried and has more than $1,900 of investment income (for 2009), he or she is subject to the so-called "kiddie tax," which causes some of the earnings to be taxed at your (the parent's) tax rate, if any of the following apply:

  • the child was younger than 18 at the end of the year.
  • the child was 18 at the end of the year and didn't have earned income that was more than half of the child's support.
  • the child was over age 18 and younger than 24 at the end of the year, was a full-time student and didn't have earned income that was more than half the child's support.

Additional Child Tax Credit

The Child Tax Credit can't reduce your tax below zero. However, if your Child Tax Credit is limited by your tax, or you qualify for a refund on last year's Child Tax Credit, you may be eligible for the Additional Child Tax Credit, even if your tax liability is zero. Your Additional Child Tax Credit is equal to either your previous unallowed child tax credit or 15% of your earned income exceeding $3000 (whichever of these two amounts is lower). If you didn't earn more than $3,000, you can claim the additional child tax credit up to the amount of Social Security taxes you paid over the year. 

If you qualify, you'll need to file Form 8812.