Can I Write Off the Kids?

They make you laugh, they make you cry, they wreck your house and they transform your life.  But can they reduce your taxes? People often talk about getting a tax break for the kids, but how does it really work?  Kids need to meet six qualifications in order to be claimed for the Child Tax Credit.

Step 1 – They Have to Be Kids

To qualify as a kid for the child tax credit, the child in question must not have turned 17 by December 31.

Step 2 – They Have to Be Related to You

If you are thinking of claiming a kid for the child tax credit, make sure he or she is your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or the child or grandchild of one of those people.  That means that your niece or nephew can qualify, as can a grandson or granddaughter.  Adopted children always count as your own children with the IRS.

Step 3 – You Need to Support Them

To claim a kid for the child tax credit, you need to have provided more than half of their support during the tax year.

Step 4 – They Need to be Your Dependents

If you want to claim your kids for the child tax credit, you also need to be claiming them as a dependent on your tax return.  That sounds pretty obvious, but divorce often can throw a wrench in this qualifier for the tax credit.  Divorce agreements often specify which parent can take the deduction for the child in a specific year.  It can even bounce back and forth from year to year.  In order to qualify for the child tax credit for a specific child, that child must also be claimed as a dependent on the current year return.

Step 5 – They Need to be Citizens

The child should be a U.S. Citizen, a U.S. national or a U.S. resident alien (here on a green card.)

Step 6 – They need to Live with You

The child needs to have lived with you for more than half of the year to qualify for the tax credit.  There are some exceptions for circumstances like boarding school and vacations.

The Income Caveat

So you are ready to write-off those kids.  Hold your horses because there is one big caveat to this tax credit.  If you are married, you start to lose the credit at $110,000 of modified adjusted gross income (MAGI.) That’s a fancy term for the number at the bottom of Page 1 of your 1040 with items like student loan interest and IRA deductions added back.  The credit phases out completely by the time your MAGI reaches $150,000.  If you are single, the phase-out starts at $75,000.  The bottom line is that if you are married and your combined family income is over $150,000, you are totally out of luck on taking the credit for those kids! The income limit often comes as a surprise to people, especially those in high cost-of-living states.  One spouse gets a raise and the family’s income crosses over that phase-out line.  Suddenly the kids are only partial tax credit qualifiers or the family might lose the credit altogether.

How Much is the Credit Worth?

The Child Tax Credit is worth up to $1,000 per qualifying child. There is no limit to the number of qualifying children or phase-out for larger numbers of children. If you have twelve qualifying children and meet the income limitations, then you can receive a $12,000 tax credit.  What is a Credit Anyway? A credit is a dollar-for-dollar reduction in the tax that you owe.  After your tax owed is calculated, the credits act as payment toward that amount.  If you owe $4,000 in tax for the year and have three kids that each qualify for the child tax credit and you meet the income requirements, then your credit of $3,000 would be applied against your tax owed for a net tax liability of $1,000. If you had money withheld from your paycheck in excess of that amount you might even get a refund.

Is This the Only Tax Break for the Kids?

No – and of course, the others are all subject to income and other qualifications. Here are some other areas where children can qualify you for deductions or credits:

  • Exemptions – subject to the dependency test and income limitations, you may take an exemption for each of your dependent children. This exemption reduces the amount of taxable income you report before your tax is calculated.
  • Additional Child Tax Credit – if you don’t owe enough tax to use up your entire Child Tax Credit calculated above, you may be eligible for the Additional Child Tax Credit, which is a refundable tax credit. This is, of course, subject to income limitations.
  • Earned Income Credit – this credit was created to incentive taxpayers to work, even when their income is low. The maximum allowable income to qualify for this credit increases if you have one eligible child, goes up more for two eligible children and maximizes and three eligible dependent children.
  • The Adoption Tax Credit – if you have added to your family by adoption, you may qualify for a credit designed to offset your out of pocket adoption expenses. This credit is subject to an income limitation.
  • The American Opportunity Credit  – this credit is for eligible dependent children enrolled at least part-time in a college degree program. It is subject to income limitations and can be partially refundable if you don’t have a tax liability for the year. It is only available for a maximum of four years and for undergraduate work.
  • The Lifetime Learning Credit – this credit is for eligible dependent children or even the taxpayers who are enrolled in non-undergraduate or less than part-time college coursework.  As usual, income limitations apply.
  • The Tuition and Fees deduction – this one is a deduction and not a credit.  It reduces your taxable income and is subject to income limitations. Depending on your personal circumstances, it can be more advantageous than the American Opportunity or Lifetime Learning Credits.

No one ever accuses the United States tax code of being simple. All of these credits and deductions come with lots of qualifications and caveats. It is always a good idea to use a good tax preparation software like TurboTax or to consult a tax advisor.