25.3 Figuring the Child Tax Credit

You use the Child Tax Credit Worksheet in the IRS instruction booklet or in Publication 972 to figure the credit. You do not attach the worksheet to your return.

Phaseout formula.

If your income exceeds the phaseout threshold shown in 25.2, the maximum credit for 2012 of $1,000 per qualifying child is reduced by $50 for each $1,000 (or fraction of $1,000) that your AGI exceeds the phaseout threshold (25.2) for your filing status. The computation is made on the worksheet in the IRS instructions. See Example 2 below.

Liability limitation.

The IRS worksheet limits the child tax credit to your tax liability (regular tax plus alternative minimum tax, if any). If you are subject to the phaseout rule, the amount of the credit allowed after the phaseout computation is subject to the liability limitation. Tax liability is reduced on the worksheet by certain other credits that you claim. If your credit exceeds your liability, the credit is limited to the liability but you can probably claim the “additional child tax credit”, which is refundable; see below.

Refundable portion of credit claimed as additional child tax credit.

If the full amount of the credit cannot be claimed on the Child Tax Credit Worksheet because of the tax liability limitation, you may be able to obtain a refund for the balance in the form of the additional child tax credit. The credit for 2012 is refundable to the extent of 15% of your taxable earned income plus tax-free combat pay (35.4) in excess of $3,000. If your earned income is not over $3,000, a refundable credit may still be available if you have three or more qualifying children and you paid Social Security taxes that exceed your earned income credit (25.13), if any. Follow the IRS instructions for figuring the additional credit. Any portion of the credit that is phased out as discussed above is “lost” and is not eligible for the additional credit.

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Refundable Credit
The refundable portion of the child tax credit for 2012 is 15% of taxable earned income in excess of $3,000. Combat pay that is otherwise excluded from income (35.4) is treated as taxable earned income for purposes of figuring the refundable amount.
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EXAMPLES
1. Carl and Abby’s only children, twin daughters, were born in 2012. Carl and Abby file a joint return for 2012, report AGI of $44,000, and claim the standard deduction. Their AGI is well below the $110,000 phaseout threshold (25.2). They may claim the full child tax credit of $2,000 ($1,000 per child), as it does not exceed their tax liability.
2. Jane is single and has two dependent children, ages six and three. She files her 2012 return as head of household. Her 2012 AGI is $77,500. Because her AGI exceeds the $75,000 phaseout threshold for a head of household, her credit for 2012 is reduced. Jane’s credit limit of $2,000 is reduced by $50 for each $1,000 or fraction of $1,000 of excess AGI. The excess income of $2,500 is rounded up to $3,000 (next multiple of $1,000) and multiplied by the phaseout percentage of 5%, resulting in a credit reduction of $150 ($3,000 × 5%). Jane may claim a child tax credit of $1,850 ($2,000 − $150) on her 2012 return. She is not subject to the liability limitation as her liability exceeds the $1,850 credit.
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