Tax season is in full gear, and millions of Americans want to save as much as they can on their tax bill. Yet many people believe there's no point in looking for lucrative tax breaks, figuring only the rich benefit from favorable rules in the tax code. Fortunately, though, the tax laws make many valuable tax breaks available even to those with more modest incomes; one in particular can boost your refund or cut thousands of dollars off your IRS bill with no extra effort on your part. Let's look at how you can potentially earn savings from what many would think of as an unlikely source: your children.
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The Child Tax Credit and your familyThe Child Tax Credit offers many families an opportunity to cut their tax bills by $1,000 for every child they have who is 16 years old or younger at the end of the tax year. To claim the credit for a given child, the child must be your dependent and related to you in one of the ways listed in the rules, which include not only sons and daughters but also siblings, nieces and nephews, and grandchildren. Adopted children can also qualify for the credit. The child also must be a U.S. citizen and has to live with you for more than half the year, and you must have provided at least 50% of the child's financial support during the year.
When it first became law, the Child Tax Credit was a nonrefundable credit, which meant that if you didn't already owe any taxes, you couldn't use the credit to get any money back from the IRS.But more recently, the Additional Child Tax Credit allowed some families to collect IRS refunds even if they didn't have any tax liability, extending a refundable credit to those who qualify.
As a result, the Child Tax Credit has become one of the most popular and largest tax credits available. Almost 22.9 million taxpayers claimed the Child Tax Credit in the most recent year for which data is available,according to IRS statistics, and those credits added up to $27.7 billion. What's more, 20.5 million of those taxpayers also qualified for the Additional Child Tax Credit, which almost exactly doubled the total savings for American taxpayers from child-related credits. All told, the $55.4 billion equated to $2,422 in total tax breaks from both credits for those who qualified.
What could keep you from claiming the Child Tax Credit?The same IRS data noted that more than 70.4 million children met the requirements to claim the Child Tax Credit. That raises an obvious question: if the credit is $1,000 per child, where did roughly $15 billion in unclaimed credits go?
Two facets of the tax laws explain the issue. First, the Child Tax Credit is only available to those who earn less than certain threshold levels of income:
For every $1,000 you earn above the threshold, your maximum credit drops by $50. As a result, the point at which your credit completely phases out depends on how many children you have; for every qualifying child, it takes $20,000 of additional income to eliminate the $1,000 from that child's credit.
Second, those who need to claim the Additional Child Tax Credit to get the full $1,000 have to meet other requirements. Specifically, you need to have at least $3,000 in earned income from sources including wages, salaries, tips, or self-employment to qualify for this refundable credit. If you don't meet that test, then some or all of your tax credits won't be available.
Yet there's also a third reason why these figures don't match up: some people don't realize they can claim the credit in the first place. In particular, certain calculations involved in determining the Additional Child Tax Credit can become complicated, leading some taxpayers to give up even if it means missing out on four-figure savings on their tax returns.
Those who have children know quite well just how expensive it can be to support them. By extending families a tax break through the Child Tax Credit, the federal government aims to make a small dent in the costs of raising a child. If you qualify, you shouldn't hesitate to claim this credit and the opportunity to save thousands of dollars in taxes as your child grows up over the years.
The article The Average American Family Saved $2,422 on Their Taxes From This Simple Tax Break. How Did You Compare? originally appeared on Fool.com.
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