If You Have Children, Read This Before Doing Your Taxes
You probably know that kids are expensive, but you may be downright astounded to learn that the cost of raising a child from birth through age 17 is now estimated at $233,610. In other words, you might spend close to a quarter of a million dollars before you even write out your first college tuition check. It's for this reason that so many parents are desperate for whatever financial relief they can get.
Thankfully, the IRS offers a number of tax breaks for parents, including the Child Tax Credit. If you have kids, it pays to see whether you're eligible to claim this credit and lower your tax bill, as a result.
How tax credits work
Some people think tax credits and deductions are the same thing, but they actually work quite differently. A tax credit is a dollar-for-dollar reduction of your tax liability, whereas a deduction is a means of excluding some of your income from taxation. A $1,000 tax credit will actually do you more good than a $1,000 deduction. With the credit, you'll get to subtract $1,000 directly from your tax bill, whereas the deduction will only save you whatever portion of $1,000 you'd typically lose to taxes.
How the Child Tax Credit works
The Child Tax Credit is an accountant's dream because it's very simple to figure: You get a $1,000 credit for every eligible child in your household under the age of 17. That said, higher earners won't get to benefit from the credit in full, as it begins to phase out at the following modified adjusted gross income levels:
- $75,000 for single filers
- $110,000 for couples filing jointly
- $55,000 for married couples filing separately
Here's what happens above these limits: For each $1,000 of income you earn, your credit is slashed by $50, which means high-enough earners won't get anything at all. If you're a married couple filing jointly with one qualifying child, and your income is $112,000, you'll only get $900 out of the credit. But the good news is that whatever reduction you face is applied on a per-family basis, not per child, so if you have two qualifying children in our example instead of just one, you'll still only face a $100 decrease.
Another thing you should know about the Child Tax Credit is that it's nonrefundable, which means that the most it can do is knock your tax liability down to $0. Let's say you owe $400 in taxes and then apply the credit for a single child at its full value of $1,000. With a refundable credit, you'd actually get a check for the $600 difference, but with the Child Tax Credit, no such luck -- you'd simply call it even at $0. There is, however, a related credit called the Additional Child Tax Credit, which, if you're eligible, could result in a refund if you don't end up owing money in taxes.
Don't wait to claim that credit
One final thing about the Child Tax Credit: You can claim it for the tax year your child was born in, regardless of when that happened. In other words, it doesn't matter if your child was born on January 1, 2016 or December 31, 2016. When you go to file your 2016 taxes, that child counts either way.
When you're dealing with the cost of raising a family, every dollar helps, so it pays to see whether you're eligible for the Child Tax Credit this year. In 2014, over 22 million taxpayers claimed the Child Tax Credit and saved a collective $27.2 billion as a result. Even if you aren't eligible for the credit in full, any amount you get out of it is essentially free money, so you might as well take what you can get.
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