The Child Tax Credit (CTC) is designed to give some economic relief to parents and guardians of children. Unlike a tax deduction (which merely reduces how much of your income is subject to federal taxation), a tax credit is a dollar-for-dollar reduction of your overall tax bill. For example, if your total tax liability to the IRS is $5,000.00 and your tax credit is $2,000.00, then your overall tax bill is reduced to $3,000.00.
In December 2017, President Trump signed the Tax Cuts and Jobs Act into law which created massive changes to the Internal Revenue Code. The standard deduction was doubled for almost all filing statuses, but personal exemptions and dependent exemptions were eliminated. Fortunately, the child tax credit was increased in value and expanded to include more income levels to offset this loss. This tax credit is a big break to lower- and middle-income class families so it pays to check if you are eligible.
- Your child must be a "qualifying child" as defined in 26 U.S.C. §152(c) to claim the credit, which includes ALL OF THE FOLLOWING:
- The child was the taxpayer's child or other descendant, or the child was the taxpayer's sibling, stepsibling or a descendant of the sibling or stepsibling. 26 U.S.C. §152(c)(2).
- The child is under age 17 at the end of the tax year. 26 U.S.C. §24(c)(1).
- The child lived with the taxpayer for more than half of the year. 26 U.S.C. §152(c)(1)(B).
- The child has not provided more than half of his or her own support during the tax year. 26 U.S.C. §152(c)(1)(D).
- The child has not filed a joint return with a spouse. 26 U.S.C. §152(c)(1)(E).
- For tax years beginning after December 31st, 2017 and before January 1st, 2026, the Child Tax Credit is increased to $2,000.00 for each qualifying child. 26 U.S.C. §24(h)(2).
- A partial credit of $500.00 is allowed for each dependent of the taxpayer who is not a "qualifying child". 26 U.S.C. §24(h)(4).
- The amount of the credit allowed is reduced by $50.00 for each $1,000.00 (or fraction thereof) that the taxpayer's modified adjusted gross income exceeds the following threshold amounts:
- $400,000.00 for joint return filers (increased from $110,000.00 by the Tax Cuts and Jobs Act of 2017). 26 U.S.C. §24(h)(3).
- $200,000.00 for filing single, head of household or qualifying widow (increased from $75,000.00 by the Tax Cuts and Jobs Act of 2017). 26 U.S.C. §24(h)(3).
- $55,000.00 for married filing separately. 26 U.S.C. §24(b)(2)(C).
- The Additional Child Tax Credit (ACTC) is the refundable portion of the Child Tax Credit up to $1,400.00 per child (meaning that even if your tax liability is zero, the taxpayer may still be entitled to a refund from the federal government up to $1,400.00 per child). This amount is adjusted for inflation for tax years after 2018. This is no longer a separate credit from the CTC (e.g. the refundable credit is the $1,400.00 portion of the $2,000.00 credit, NOT in addition to it). 26 U.S.C. §24(h)(5).
- In addition to all other CTC requirements, the taxpayer must have earned income of at least $2,500.00 for the tax year to qualify for the Additional Child Tax Credit refundable portion. Earned income is income derived from wages, salaries, tips, self-employment income, statutory employee income, nontaxable combat pay, union strike benefits or disability benefits before retirement age. However, the Additional Child Tax Credit is limited to the amount of 15% of earned income over $2,500.00 for the tax year. 26 U.S.C. §24(h)(6).
- Under the Tax Cuts and Jobs Act of 2017, the taxpayer must provide the social security number for the qualifying child on the tax return or else the Child Tax Credit will be disallowed. 26 U.S.C. §24(h)(7).
The Child Tax Credit is so valuable in reducing tax liability that it is often used to make improper or fraudulent claims. The Internal Revenue Service has become wise to taxpayers attempting to claim children who are not "qualifying children" (or even fictitious people) to avoid their tax responsibilities. Due to the heightened scrutiny surrounding the Child Tax Credit, there are legal restrictions imposed upon taxpayers when it is improperly claimed.
- If your CTC for any tax year was denied for any reason other than a math or clerical error, then the taxpayer must attach Form 8862 to the next tax return to claim the child tax credit. You will not be required to file Form 8862 after a disallowance if you already filed Form 8862 in a later year and the CTC was subsequently allowed or your CTC was not denied again in a later tax year. 26 U.S.C. §24(g)(2).
- If your CTC was disallowed because the IRS determined that your claim was due to reckless or intentional disregard of the rules and regulations, then you are barred from claiming the CTC for a period of two (2) taxable years. 26 U.S.C. §24(g)(1)(B)(ii).
- If your CTC was disallowed because the IRS determined that your claim was due to fraud, then you are barred from claiming the EIC for a period of ten (10) taxable years. 26 U.S.C. §24(g)(1)(B)(i).
In addition to these restrictions, a disallowed CTC claim can produce grounds for a 0.5% underpayment penalty (26 U.S.C. §6654), a 20% accuracy-related penalty (26 U.S.C. §6662) or even a 75% fraud penalty on the underpayment (26 U.S.C. §6663). A determination that the tax return was fraudulent can even lead to criminal prosecution!
Even the tax return preparer has duties under the law to ensure that the CTC rules are followed. 26 U.S.C. §6695(g)(2) states "[a]ny person who is a tax return preparer with respect to any return or claim for refund who fails to comply with due diligence requirements imposed by the Secretary by regulations with respect to determining ... eligibility for the amount of, ... the [CTC] shall pay a penalty... for each such failure." For tax year 2018, the penalty is $520.00 per failure. Treas. Reg. Section 1.6695-2 outlines the following due diligence requirements for tax preparers claiming the CTC for clients:
- Form 8867 (Paid Preparer's Due Diligence Checklist) must be completed and submitted with the tax return.
- All the necessary worksheets must be completed to show how the credit was computed.
- Clients should be asked all the necessary questions to determine eligibility for and amount of the CTC. It is good practice to keep a record of the questions asked and the answers provided.
- A copy of all the forms, worksheets and tax documents as well as a record of how and when the information to determine CTC eligibility or amount should be kept with the client file.
If you have questions about the child tax credit or any other aspect of federal taxation, do not hesitate to contact the attorneys at Kershaw, Vititoe & Jedinak PLC.