Published January 22, 2013
All parents hope that their children will be a credit to them. That can literally be the case at tax time.
The popular $1,000-per-child tax credit was made a permanent part of the tax code, thanks to the American Taxpayer Relief Act, also known as the "fiscal cliff" tax bill, that was enacted Jan. 2, 2013. That's great news for parents, who find the credit is an easy way to reduce their tax bills dollar-for-dollar.
In addition to the financial benefit, there are no records to keep or extra forms to file to claim the child tax credit. You simply enter the proper amount directly on your 1040 or 1040A form.
You will, however, have to fill out a worksheet to figure your exact credit amount. And if you're eligible for the additional child tax credit, there is even more paperwork involved.
There are also certain tests you -- and your kids -- must meet before the Internal Revenue Service will let you claim the tax credit.
The key requirement is that your youngster be 16 or younger at the end of the tax year.
But the child doesn't have to necessarily be your child. A qualifying child in the IRS' eyes also could be your sibling (either full or step) or a descendent of one of these relatives, such as a grandchild, niece or nephew.
As for your kids, they can be yours by birth, adoption, or because your son or daughter was placed in your foster care by a court or authorized agency.
The IRS also looks at how much income you have in providing for most of the child's care.
And the credit begins phasing out if you make $110,000 and are married, filing a joint return; earn $75,000 and file as head of household, single or qualifying widow or widower; or make $55,000 and are a married-filing-separately taxpayer.
If you take other credits, they could affect the final amount of child tax credit that you can claim. Instruction booklets for both Form 1040 and Form 1040A contain the work sheets you'll need to figure this credit. You also can find detailed examples in IRS Publication 972, Child Tax Credit.
One drawback of the child tax credit is that it is nonrefundable. That means it can help you erase your tax bill, but it won't get you a refund.
Take, for example, Jim and Joan, a couple with two kids who translate to a total child tax credit of $2,000. However, because Jim and Joan's tax bill is $900, they lose some of the tax benefit of the credit. They can use it to wipe out what they owe the IRS, but the other $1,100 is effectively lost.
But Joan, Jim and other filers in similar situations might be able to get all or some of that nonrefundable portion back via the additional child tax credit. Again, some calculations will be required to determine the exact amount of this added credit. Generally, this is 15 percent of your taxable earned income that exceeds $3,000.
And parents with three or more children might be able to get back even more. In this case, parents could possibly get an additional child tax credit up to the amount of Social Security taxes paid during the year, less any earned income credit they received.
Of course, the additional credits, like most child-related duties, require extra time and work. To calculate your precise added tax credit, you'll have to complete a work sheet and fill out Form 8812 and send it along with your individual tax return.
Or if you use tax software, that program will take you through the additional steps required to get the most tax credit from your children.
But don't let the extra paper or computer work stop you. The calculations could really pay off.