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The Child Tax Credit: What You Need to Know

Many parents struggle to keep up with the numerous expenses that come with having children, but if you have kids, you may get some federal income tax relief this year. If you claim the Child Tax Credit, you could reduce your tax liability by up to $1,000 per child. Here's a rundown of how this credit works and why it's given so many parents a reason to celebrate.

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How the Child Tax Credit works

The Child Tax Credit is one of the simplest tax credits available to parents today. Depending on your income, you may be able to lower your federal income tax by up to $1,000 for every qualifying child you have in your family under the age of 17.

Now as tends to be the case with many tax credits, the amount of money you earn will impact the ultimate value of the Child Tax Credit on your return. The credit starts to phase out at the following income levels:

  • $75,000 for single filers
  • $110,000 for couples filing jointly
  • $55,000 for married couples filing separately

For each $1,000 of income you bring in above these thresholds, your credit will be reduced by $50 -- which also means that high enough earners won't get the credit at all. So if you're a single filer with one qualifying child earning $76,000 a year, you'll be eligible for $950 as opposed to the full $1,000. Keep in mind, however, that this reduction is per family, not per child, so if you have two children and earn $1,000 over the limit, your credit will go down by just $50, not $100.  

Furthermore, the Child Tax Credit is nonrefundable, which means that the most it can do is take your tax liability down to zero. Refundable credits work differently. When a refundable credit reduces your tax liability to below zero, you're able to get a check for the difference. But if you owe $600 in taxes before the Child Tax Credit and are eligible for $1,000 courtesy of it, you won't receive a check for the remaining $400. Rather, you just won't owe any money on your taxes. There is, however, a related credit called the Additional Child Tax Credit, which may provide a refund if you don't end up owing any money in taxes.

When to claim the Child Tax Credit

You're eligible for the Child Tax Credit the year your first child is born, regardless of when that happens. So if your child is born on December 31, 2016, you can still claim the Child Tax Credit for the 2016 tax year.

Another thing to remember about the Child Tax Credit is that like all credits, it will reduce your income dollar-for-dollar for tax purposes. Deductions, by contrast, reduce your taxable income, which can work out quite differently. A $1,000 tax deduction means you don't have to pay taxes on $1,000 in income. If your effective tax is rate 25%, that saves you $250 on your taxes. But if you get a $1,000 credit, you'll automatically shave that full $1,000 off your taxes.

All in all, the Child Tax Credit has saved more than 22.5 million taxpayers over $27 billion on their taxes, so if you have children under the age of 17, it pays to see if you're eligible. The cost of raising kids isn't going down anytime soon, so it pays to take advantage of whatever tax breaks you're eligible for.

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