One aspect of the new tax that is quite important to almost all taxpayers with children is the child tax credit. The dependent exemptions of the past are now gone, and other than a $500 credit for dependents other than the taxpayer and spouse, so this becomes the premier tax reduction vehicle for families

For dependent children under 17, the new law increases the child tax credit to $2,000 per child. The child must either be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece or nephew. An adopted child is always considered your own child. Being a dependent requires that the child does not provide more than half of their own support and they must be claimed as a dependent on your federal tax return. The child must have a Social Security number issued before the due date for filing the return. If the child reaches 17 during the year no credit will apply.

The credit is available to many more taxpayers than in previous years. Unfortunately though, there is still a phase out, however, it is at much higher levels of adjusted gross income, in excess of $400,000 (in the case of married taxpayers filing a joint return) and $200,000 (for all other taxpayers) and you lose $50 for each $1,000 over the threshold, thus you fully phase out at $40,000 above those thresholds. Here’s a quick example of how the phase-outs work. Let’s assume that as a single taxpayer, you are entitled to a credit of $2,000 but your income is above the $200,000 threshold: it’s $201,000. Your credit would be reduced by $50 (because you’re $1,000 over the threshold amount) so that your available credit is $1,950.

For lower income Americans, there is a refundable portion of the credit, that is, if you don’t pay Federal Income Tax you can get cash back of up to $1,400 per child.

Its important to realize that if you have three or more qualifying children, you need to use an alternative formula to determine the refundable portion. Under that alternative formula, the refundable portion is equal to the amount by which your Social Security taxes (those taken out of your wages or paid out as self-employment taxes) exceed your earned income credit. It’s a little complicated so check with your tax advisor.

A tax credit is quite a lot more valuable than a deduction, as with a deduction you only save a portion, your marginal income tax rate. With a credit, it’s the face value of that credit in your pocket, so cherish the gift!

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