25.2 Child Tax Credit for Children Under Age 17

For 2012, you may be able to claim a tax credit of $1,000 for each qualifying child who is under age 17 at the end of 2012. To figure the exact amount of your credit, however, you must complete the “Child Tax Credit Worksheet” in the IRS instructions to Form 1040 or 1040A. On the IRS worksheet, you determine if the potential credit ($1,000 × number of qualifying children) is limited by the phaseout rule and if it is, whether the reduced credit is limited by your tax liability (regular tax plus AMT minus specified credits).

The potential credit is phased out by 5% of your adjusted gross income in excess of the phaseout threshold, shown below. If the credit, after application of the phaseout rule, is more than your tax liability (25.3), your credit is limited to the liability. However, even if the credit does exceed your tax liability, part or all of the credit may be refundable as an additional credit if your earned income for 2012 exceeds $3,000 or you have three or more children (25.3).

Law Alert

Child Tax Credit After 2012

Without new legislation, the child tax credit would drop to $500 per qualifying child in 2013. The refundable part of the credit would also be restricted. Congress is expected to extend the more favorable 2012 credit rules to 2013, but had not yet done so when this book went to press; see the e-Supplement at jklasser.com for an update.

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Qualifying child.

The credit may be claimed for a child who is under age 17 at the end of 2012 if the child is your “qualifying child” under the dependency exemption rules in 21.3 and you are otherwise entitled to the exemption for the child. A qualifying child may be your child, stepchild, grandchild, great-grandchild, brother, sister, stepbrother, stepsister, half-brother or -sister, or the descendant of any of these. An adopted child qualifies if placed with you by an authorized agency for legal adoption, even if the adoption is not final by the end of 2012. A foster child placed with you by a court or an authorized agency qualifies. A qualifying child must live with you for over half the year and not provide over half of his or her own support (21.3). The child also must be a U.S. citizen, resident, or national, or an adopted child who lived with you all year, in order for you to claim the credit for him or her.

Phaseout of credit.

The credit is limited or eliminated if your adjusted gross income is above a threshold amount for your filing status. In applying the phaseout, AGI is increased by any foreign earned income exclusion, foreign housing exclusion or deduction, or possession exclusion for American Samoa residents. If your income exceeds the following threshold for your filing status, see 25.3.

Changing your withholding.

If you can claim the child tax credit, you may have too much tax withheld from your wages during the year. If so, you can claim more withholding allowances. File the new Form W-4 with your employer so that less income tax will be withheld.