Have Kids? The Average American Family Saved $2,423 Using This Tax Break

By Dan Caplinger Markets Fool.com

Raising a family is expensive, and parents need all the help they can get to cover the costs of having children. The Child Tax Credit was designed to provide at least some small financial relief for tax-paying American parents, and tens of millions of families take advantage of the provision each and every year. Let's look more closely at the Child Tax Credit to see whether you might be one of the fortunate parents who can use it to cut their tax bill.

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Image source: Getty Images.

The basics of the Child Tax Credit

As tax laws go, the Child Tax Credit is one of the easiest provisions of the tax code to understand. When lawmakers created the credit, they wanted to keep things simple. The result was a $1,000 credit for every eligible child in the taxpayer's family. Choosing to make the provision a tax credit, rather than a deduction meant that everyone who qualifies gets the same amount in tax savings, avoiding the inequality issues that tax deductions can create.

Only certain children qualify for the Child Tax Credit. The child must be aged 16 or younger at the end of the tax year for which you're claiming the credit, and the child must be eligible to be your dependent on your tax return. In addition, the child must be related to you, though you need not be the parent. In some cases, grandparents, siblings, or uncles and aunts can use the credit. Also, if you want to claim the credit, the child has to live you for more than half the year, and you have to provide at least half of the financial support the child needs for the year.

Perhaps the best feature of the Child Tax Credit is that it has a related provision that allows some taxpayers to get its benefits even if they wouldn't otherwise have enough tax liability to do so. Most credits are nonrefundable, which means that once your tax liability drops to zero, any leftover credit amount is forfeited. For example, if your tax liability is $500 and you're eligible for $1,000 in nonrefundable credits, then those credits will wipe out the tax you owe, but you'll never receive the remaining $500 in credits.

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However, the Additional Child Tax Credit is refundable, so if you qualify, then any unused portion of the regular Child Tax Credit will be added to your refund check from the IRS. The refundable portion is known as the Additional Child Tax Credit, and taxpayersgenerally need to have earned income from wages, salaries, or other sources of at least $3,000 to claim it.

Because of that, the credit is extremely popular. Nearly 22.4 million taxpayers claimed the Child Tax Credit in 2014 (the most recent year for which the IRS has provided data), and those credits added up to more than $27.2 billion. Nearly all of those taxpayers -- 20.2 million in all -- also qualified for the Additional Child Tax Credit, and they got an additional $27.1 billion from that provision. All told, the combined total of more than $54 billion worked out to an average of $2,423 for each taxpayer claiming the credit.

Why you might not get the full $1,000

About 69 million children qualified for the Child Tax Credit, according to IRS data. That shows that some people aren't getting the full benefit of the credit, because the total amount claimed doesn't add up to $69 billion -- or $1,000 per child.

The reason is that the full $1,000 Child Tax Credit is only available to taxpayers whose modified adjusted gross income doesn't exceed certain amounts. The levels typically don't change from year to year and are as follows:

Filing Status

Child Tax Credit Phaseout Begins at This MAGI Level

Single, Head of Household, or Qualifying Widow(er)

$75,000

Married Filing Jointly

$110,000

Married Filing Separately

$55,000

Data source: IRS.

For every $1,000 (or portion thereof) that you earn above those threshold amounts, your maximum credit for your family drops by $50. Therefore, depending on how many children you have, earnings above a certain level can leave you with no credit at all. Also, some people don't meet the requirements for taking the Additional Child Tax Credit and therefore miss out on the refundable portion of the credit.

Yet unfortunately, many people don't even realize that these credits are available. That's one reason why the IRS held its EITC Awareness Day for the Earned Income Tax Credit and added other family-friendly provisions to its outreach efforts, including the Additional Child Tax Credit.

If you have kids, every little bit helps, and getting $1,000 per child from the IRS can be vital. Be sure to claim the Child Tax Credit and Additional Child Tax Credit if you can to help your family get the most support it can.

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