Child tax credit

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A child tax credit is a tax credit available in some countries, which depends on the number of dependent children in a family. The credit may depend on other factors as well, such as income level. For example, in the United States only families making less than $110,000 per year may claim the full credit. Similarly, in the United Kingdom the tax credit is only available for families making less than £42,000 per year.

Germany[edit]

Germany has a programme called the "Kinderfreibetrag" [de] which functions as a tax credit. The child allowance is an allowance in German tax law, which a certain amount of money is tax-free in the taxation of parents. In the income tax fee paid, child benefit and tax savings through the child tax credit are compared against each other, and the parents pay whichever results in the lesser amount of tax.

United Kingdom[edit]

In the United Kingdom, a family with children and an income below about £32,200 could claim child tax credit on top of child benefit. The tax credit is "non-wastable" – it is paid whether or not the family has a net tax liability – and is paid in or out of work. Higher rates are paid for disabled children. It is integrated with the working tax credit, which also provides support for childcare costs.

All taxable income is tested for the credit, so a couple who both work and have children, will have both salaries taken into account. Tax Credits may be capped which it is claimed could affect the poorest families disproportionately. On Monday 26 October 2015, the House of Lords voted for Labour Party proposals for financial redress to those affected by reduced entitlements.[1]

Since 2018 Child tax credit has been replaced by Universal Credit for most people.

United States[edit]

There are several different tax credits an American taxpayer can claim. (Tax credits work differently than tax deductions.) One of the most common is the Child Tax Credit, provided by 26 U.S.C. Sec. 24. The CTC is believed to have lifted about 3 million children out of poverty in 2016.[2]

Changes under the TCJA of 2017[edit]

The Tax Cuts and Jobs Act of 2017, with efforts led by Sen. Marco Rubio (R-FL) and Ivanka Trump, made three major changes to the CTC: (1) doubled the amount per qualifying child, from $1,000 to $2,000, (2) made up to $1,400 is refundable, and (3) increased income thresholds to make the CTC available to more families.[3]

The child tax credit is available to taxpayers who have a "qualifying child." A person is a "qualifying child" if he or she has not attained the age of 17 by the end of the taxable year and meets the requirements of 26 U.S.C. Sec. 152(c). In general, a qualifying child is any individual for whom the taxpayer can claim a dependency exemption and who is the taxpayer’s son or daughter (or descendant of either), stepson or stepdaughter (or descendant of either), or eligible foster child. For unmarried couples or married couples filing separately, a qualifying child will be treated as such for the purpose of the Child Tax Credit for the taxpayer who is the child’s parent, or if not a parent, the taxpayer with the highest adjusted gross income for the taxable year in accordance with 26 U.S.C. Sec. 152(c)(4)(A).

Since 2018, the Child Tax Credit is $2,000 per qualifying child. When first introduced in 1998, the per-child amount was originally capped at $400, and then at $500 in 1999, by the Taxpayer Relief Act of 1997. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) would have gradually increased the cap from $600 in 2001 to $1,000 in 2010, before reverting to $500.[4] However, the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) increased the amount to $1,000 for 2003 and 2004. The Working Families Tax Relief Act of 2004 extended this amount through 2010.[4] The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended this $1,000 cap through the end of 2012.[5] The American Taxpayer Relief Act of 2012 made the $1,000 cap permanent.[6]

In general, the Child Tax Credit is nonrefundable. In theory, because this is a tax credit and not a refund, if a person's tax liability is less than the credit value, any unused credit is lost. In practice, this problem affected a relatively small number of very low-income families, but they could access this unused portion under a related refundable program called the "Additional Child Tax Credit." Beginning in 2018, any unused CTC is refundable up to $1,400 (calculated as 15% of the family's earned income).

Prior to 2018, the full CTC was only available to single parents making less than $75,000 and families making less than $110,000 per year. The Tax Cuts and Jobs Act dramatically increased these income thresholds to $200,000 for single parents and $400,000 for married couples filing jointly. Above these limits, the CTC is phased out at the rate of $50 for each additional $1,000 (or portion of $1,000) earned.[7]

Other Dependent Credits[edit]

The Tax Cuts and Jobs Act of 2017 also created an additional dependent credit, allowing families to claim an additional $500 for aging parent or a older child requiring special care.[3]

The Child and Dependent Care Credit allows a parent or family to deduct $3,000 per child or a total of $6,000 for multiple dependents.[8]

See also[edit]

Notes[edit]

  1. ^ "Tax credits: No return to 'uncontrolled' spending says Osborne". BBC News. 27 October 2015. Retrieved 3 September 2016.
  2. ^ M.S.R. (16 October 2017). "Why Ivanka Trump wants to extend the child tax credit". The Economist.
  3. ^ a b CFP, Matthew Frankel (9 January 2018). "The 2018 Child Tax Credit Changes: What You Need to Know -". The Motley Fool. Retrieved 21 March 2019.
  4. ^ a b "NYSSCPA | The New York State Society of CPAs". www.nysscpa.org. Archived from the original on 6 May 2013. Retrieved 3 September 2016.
  5. ^ "TAX RELIEF, UNEMPLOYMENT INSURANCE REAUTHORIZATION, AND JOB CREATION ACT OF 2010". gpo.gov. Retrieved 2 September 2016.
  6. ^ Nunns, James R.; Rohaly, Jeffrey (8 January 2013). "Tax Provisions in the American Taxpayer Relief Act of 2012 (ATRA)". Tax Policy Center. Retrieved 3 September 2016.
  7. ^ "Child Tax Credit" (PDF). irs.gov. Internal Revenue Service. 1 January 2015. Retrieved 2 September 2016.
  8. ^ "Child and Dependent Care Tax Credit for 2018, 2019". American Tax Service. 11 December 2018. Retrieved 21 March 2019.

References[edit]