Although the child tax credit is simple in concept, it's actually quite complicated in application. On their tax returns, taxpayers are entitled to a tax credit of $2,000 for each dependent child under age 17. That seems simple enough, but a look at the details reveals how complex the child tax credit really is.
- Credit phases out. The credit begins phasing out at the rate of $50 for each $1,000 of modified adjusted gross income in excess of $400,000 for joint tax filers ($200,000 for single taxpayers). The length of the phase-out range varies depending on the number of children a taxpayer has who qualify for the credit.
- Refundable - with exceptions. Some lower-income families who qualify for the child tax credit, but who don't earn enough to pay income tax, may be entitled to a check from the government through what is called a "refundable credit." A refundable credit means you get the benefit of the credit even when you don't pay enough in taxes to use the credit. The government sends you a check for the amount of credit that exceeds your tax liability.
- What about divorce? In the case of divorced or separated couples, the spouse who is entitled to the dependency exemption is entitled to take the child tax credit.
- Withholding adjustments. If you will be eligible to claim more (or fewer) dependent children under age 17 on your tax return this year than you claimed last year, consider adjusting your withholding. You can adjust your withholding at any point in the year by giving your employer a revised Form W-4.
- Credit protected from the AMT. The current law protects the child credit from being reduced by the alternative minimum tax (AMT). This tax hits taxpayers with a large number of deductions and exemptions.