Transcript Slide 1

VITA: 01/17/09
Lesson 26: Child Tax Credit
Winter 2008
Kristina Shroyer
Lesson 26: Child Tax Credit
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Introduction
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There are really two credits included in this, there is a non-refundable Child
Tax Credit and there is a potential refundable Additional Child Tax Credit
1040-EZ Filers cannot take this credit
What is the Child Tax Credit?
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The Child Tax Credit is a nonrefundable credit that allows taxpayers to clam
a tax credit of up to $1,000 per qualifying child
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Remember credits directly reduce a taxpayer's tax liability
Remember that non-refundable credits cannot reduce a taxpayer's tax
liability below zero (so they cannot generate a refund)
What is the Additional Child Tax Credit?
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The Additional Child Tax Credit is a refundable tax credit that taxpayers
that aren't able to claim the full child tax credit may be able to claim
A refundable credit can reduce a taxpayers tax liability to below zero and
generate a refund
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This means this credit could result in a refund even if a taxpayer does not owe
tax
Lesson 26: Child Tax Credit
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Who Can Claim the Child Tax Credit
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To claim the child tax credit, the taxpayer must have at least one
qualifying child
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Definition of a qualifying child – see Tab G in the Volunteer Resource Guide (page
G-6)
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The child must be under age 17 at the end of the tax year
The child must be a U.S. Citizen, U.S. National, or resident of the United States
The child must be claimed as the taxpayer's dependent
The child must have a certain relationship with the taxpayer
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5.
6.
The child can not provide over half of his or her own support
The child must have lived with the taxpayer for more than half the tax year
On page G-7 of Tab G in the Volunteer Resource Guide is a Interview
sequence you can go through with the taxpayer to see if a child is a
qualifying child
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See #4 on page G-6 under Tab G of the volunteer resource guide
This definition of qualifying child applies to both credits
Look at the Example at the top of page 26-2
Lesson 26: Child Tax Credit
Who Can Claim the Child Tax Credit (continued)
Rule #3: The child must be claimed as the taxpayer's dependent
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A closer look at whether or not the child has to be the taxpayer's
dependent to claim the Child Tax Credit
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The general answer is YES, the taxpayer MUST claim the dependency exemption for
the child on their tax return in order to claim the Child Tax Credit
Exception: Taxpayers may still be able to claim the credit if their qualifying child is
not claimed as their dependent for either of the following reasons:
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The taxpayer (and spouse if MFJ) can be claimed as a dependent on someone else's
return
The taxpayer's qualifying child is married and files a joint return for the tax year (and that
joint return was not filed only as a claim for refund, meaning at least one spouse would
have a tax liability if they had filed separate returns)
Form 8901
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If a taxpayer claims a non-dependent child for purposes of the child tax credit only,
this form must be filled out
Let's take a look at this form
You can get this one from the IRS website
Lesson 26: Child Tax Credit
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Who Can Claim the Child Tax Credit (continued)
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Rule #3 (continued): The child must be claimed as the taxpayer's dependent
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Are there special rules for children of divorced, separated or never married
parents?
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In most cases for these situations, the custodial parent (the parent having custody for the greater
part of the year)
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However, the non-custodial parent may be entitled the claim the dependency exemption and thus
the child tax credit & additional tax credit (this could be specified in the separation or divorce
instrument)
A custodial parent's release of the dependency exemption will also release the child tax credit and
additional child tax credit for that qualifying child if either applies
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Noncustodial parents must attach Form 8332 or a similar statement to their tax return for each year the
dependency exemption is claimed
See Tab G of The Volunteer Resource Guide, page G-7
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may claim the dependency exemption for the qualifying child and thus the child tax credit & additional
child tax credit
custody in this case means the child lives in the parent's home
The bottom right box talks about Children of Divorced or Separated Parents and when the noncustodial parent gets the dependency exemption and if qualified the child tax credit and additional
child tax credit
There are also some other exceptions at the bottom of this page (Kidnapped Child and Exception to
Time Lived with taxpayer)
Look at Example at the top of Page 26-3
Lesson 26: Child Tax Credit
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What is the amount of the Child Tax Credit?
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The maximum amount of the Child Tax Credit is $1,000 for each qualifying
child
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This maximum amount can be reduced or eliminated based on the
taxpayer's:
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tax liability, modified adjusted gross income, and/or filing status
The amount of the Child Tax Credit may be reduced for the two reasons
stated below (and on the middle of page 26-3):
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The taxpayer's tax liability less (minus) the majority of the non-refundable credits is less
than the maximum child tax credit (remember this one is non-refundable)
MAGI is above the limit for the taxpayer's filing status
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See Volunteer Resource Guide, Tab G, page G-8, Question 7 for the limits (they are also
listed below)
Basically it's saying this…if for your filing status your MAGI is above the limit your credit
may be reduced or eliminated
MAGI Limits (any thing over these are a credit reduction):
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The taxpayers credit may be reduced if their MAGI is more than:
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$110,000 and they are Married Filing Jointly
$75,000 and they are filing as Single, Head of Household or Qualifying Widower
$55,000 if they are Married Filing Separately
Lesson 26: Child Tax Credit
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What is the amount of the Child Tax Credit? (continued)
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There are two different worksheets/publications that can be used to figure the credit
depending on the taxpayer's situation
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Publication 972 or the Child Tax Credit Worksheet
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This Child Tax Credit Worksheet is in the Form 1040 Instructions page
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Publication 972 is used in the case of a Reduced Credit (in your Publication 4491-W page 232-233)
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Everyone can use this worksheet but if qualified to do so the taxpayer should use the other simpler worksheet
The Questionnaire on page G-8 of Tab G of the Volunteer Resource Guide should be used to
determine which worksheet must be used
Tip: TaxWise will do all of these calculations for you
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Let's look through it
the important part is that you get the right information from the taxpayer to enter into TaxWise
You also need to be able to explain to the taxpayer why their credit has been reduced or eliminated so
you do need to understand the rules and understand when a credit is reduced/eliminated
What is MAGI?
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For most taxpayer's it’s the same as AGI but for some taxpayers there may be "modifications –
additions or subtractions" from AGI to arrive at MAGI
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Let TaxWise or the Tax Worksheet/Publication/Form lead you through these types of calculations…if you
enter the information right you'll get the right calculation
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Question: If a taxpayer has a tax liability of zero can they take the Child Tax
Credit?
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Do Exercises on Page 26-4.
Lesson 26: Child Tax Credit
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How to determine the taxpayer's eligibility for the credit and how to calculate the
credit
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We already discussed the Interview Techniques to use that are in Tab G (page G-7) of
the volunteer resource Guide
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This interview is determining eligibility for both the Child Tax Credit and the Additional Child tax Credit
which we will discuss next
Let's review the basic things that need to be verified about the child on page 26-5 of Publication 4491
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In computing the credit make sure the correct worksheet is used (based on the
interview)
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TaxWise will determine eligibility and calculate the credit for you provided
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HOWEVER: Always check the calculated credit and make sure it seems right…..double
check the worksheet used to computer the calculation
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You entered the correct information in the dependents/non-dependents section
The return is completed through a certain line (which we haven't gotten to yet)
Don't assume the computer is always right…a mistake in input can result in an inaccurate credit…the
computer knows no better
Where is the Child Tax Credit Reported on the Form 1040?
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Line 52 in the Tax and Credits Section
This is a DIFFERENT Section than where the Additional Child Tax Credit will be reported
Lesson 26: Additional Child Tax Credit
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What is the Additional Child Tax Credit?
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Some taxpayers that get less than the full amount of the Child Tax Credit may qualify for the Additional
Child Tax Credit
The Additional Child tax credit is a refundable credit so unlike the Child Tax Credit it could give the
taxpayer a refund if they don't owe tax
General Information on the Additional Child Tax Credit
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The qualifying child rules are the same
It allows eligible taxpayers to claim up to a $1000 Additional Child Tax Credit for each child
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Any allowable amount of the Child Tax Credit claimed must be subtracted
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So this means the maximum per child for both credits combined is $1000
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What are the Eligibility Rules?
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This credit is generally based on the lesser of:
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15% of the taxpayers taxable earned income that is over $8,000
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NOTE: This amount is different than that in your book! See the supplement – this was CHANGED
due to the Emergency Economic Stabilization Act!
So taxpayers with earned income of less than this amount are generally not eligible for the additional credit
The amount of the unused Child Tax Credit (caused because the taxpayer's liability was less than the
allowed credit)
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The general rules for eligibility for the Additional Child Tax Credit are on page G-6 in Tab
G of the Volunteer Resource Guide
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Look at the example on page 26-6
Lesson 26: Additional Child Tax Credit
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What are the Eligibility Rules? (continued)
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Are there any Exceptions to the General Eligibility Rules?
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Exception: Taxpayers who have three or more qualifying children
and have taxable earned income less than $8,000 (change this
number in your book) may still qualify for the Additional Child Tax
Credit IF:
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Yes
They had Social Security or Medicare taxes withheld from their pay
They were self employed and paid self-employment tax
The paid tax on tips not reported to their employer
Form 8812
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This is the form used to calculate the Additional Child Tax Credit
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Let's take a look at it
Part II of the form deals with the exception above
The Form is on Page 214 in Appendix C of your Publication 4491-W
Lesson 26: Additional Child Tax Credit
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How is the Additional Child Tax Credit Calculated?
Form 8812 is used to calculate the Credit
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TaxWise verifies the taxpayer's eligibility and calculates the Amount
Where does the final Tax Credit show?
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On the Form 1040 it is on line 66 in the PAYMENTS section
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Note this is a different section than where the Child Tax Credit showed up
How to Avoid Common Errors Associated with the Child Tax
Credit and Additional Child Tax Credit
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Make sure each child is eligible
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This means to be very thorough in the interview
Note any unusual situations on the intake/interview sheet
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These are things that need to be looked at and double checked in quality
review
An example of something to make note of would be if a dependent cannot
be claimed but the nondependent child is still eligible for the child tax credit
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Remember a Form 8901 needs filled out in this situation