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VITA: 01/17/09 Lesson 26: Child Tax Credit

VITA: 01/17/09 Lesson 26: Child Tax Credit. Winter 2008 Kristina Shroyer. Lesson 26: Child Tax Credit. Introduction There are really two credits included in this, there is a non-refundable Child Tax Credit and there is a potential refundable Additional Child Tax Credit

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VITA: 01/17/09 Lesson 26: Child Tax Credit

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  1. VITA: 01/17/09Lesson 26: Child Tax Credit Winter 2008 Kristina Shroyer

  2. Lesson 26: Child Tax Credit • Introduction • There are really two credits included in this, there is a non-refundable Child Tax Credit and there is a potential refundable Additional Child Tax Credit • 1040-EZ Filers cannot take this credit • What is the Child Tax Credit? • The Child Tax Credit is a nonrefundable credit that allows taxpayers to clam a tax credit of up to $1,000 per qualifying child • Remember credits directly reduce a taxpayer's tax liability • Remember that non-refundable credits cannot reduce a taxpayer's tax liability below zero (so they cannot generate a refund) • What is the Additional Child Tax Credit? • The Additional Child Tax Credit is a refundable tax credit that taxpayers that aren't able to claim the full child tax credit may be able to claim • A refundable credit can reduce a taxpayers tax liability to below zero and generate a refund • This means this credit could result in a refund even if a taxpayer does not owe tax

  3. Lesson 26: Child Tax Credit • Who Can Claim the Child Tax Credit • To claim the child tax credit, the taxpayer must have at least one qualifying child • Definition of a qualifying child – see Tab G in the Volunteer Resource Guide (page G-6) • The child must be under age 17 at the end of the tax year • The child must be a U.S. Citizen, U.S. National, or resident of the United States • The child must be claimed as the taxpayer's dependent • The child must have a certain relationship with the taxpayer • See #4 on page G-6 under Tab G of the volunteer resource guide • The child can not provide over half of his or her own support • The child must have lived with the taxpayer for more than half the tax year • On page G-7 of Tab G in the Volunteer Resource Guide is a Interview sequence you can go through with the taxpayer to see if a child is a qualifying child • This definition of qualifying child applies to both credits • Look at the Example at the top of page 26-2

  4. Lesson 26: Child Tax Credit • Who Can Claim the Child Tax Credit (continued) • Rule #3:The child must be claimed as the taxpayer's dependent • A closer look at whether or not the child has to be the taxpayer's dependent to claim the Child Tax Credit • The general answer is YES, the taxpayer MUST claim the dependency exemption for the child on their tax return in order to claim the Child Tax Credit • Exception: Taxpayers may still be able to claim the credit if their qualifying child is not claimed as their dependent for either of the following reasons: • The taxpayer (and spouse if MFJ) can be claimed as a dependent on someone else's return • The taxpayer's qualifying child is married and files a joint return for the tax year (and that joint return was not filed only as a claim for refund, meaning at least one spouse would have a tax liability if they had filed separate returns) • Form 8901 • If a taxpayer claims a non-dependent child for purposes of the child tax credit only, this form must be filled out • Let's take a look at this form • You can get this one from the IRS website

  5. Lesson 26: Child Tax Credit • Who Can Claim the Child Tax Credit (continued) • Rule #3 (continued):The child must be claimed as the taxpayer's dependent • Are there special rules for children of divorced, separated or never married parents? • In most cases for these situations, the custodial parent (the parent having custody for the greater part of the year) • may claim the dependency exemption for the qualifying child and thus the child tax credit & additional child tax credit • custody in this case means the child lives in the parent's home • However, the non-custodial parent may be entitled the claim the dependency exemption and thus the child tax credit & additional tax credit (this could be specified in the separation or divorce instrument) • A custodial parent's release of the dependency exemption will also release the child tax credit and additional child tax credit for that qualifying child if either applies • Noncustodial parents must attach Form 8332 or a similar statement to their tax return for each year the dependency exemption is claimed • See Tab G of The Volunteer Resource Guide, page G-7 • The bottom right box talks about Children of Divorced or Separated Parents and when the non-custodial parent gets the dependency exemption and if qualified the child tax credit and additional child tax credit • There are also some other exceptions at the bottom of this page (Kidnapped Child and Exception to Time Lived with taxpayer) • Look at Example at the top of Page 26-3

  6. Lesson 26: Child Tax Credit • What is the amount of the Child Tax Credit? • The maximum amount of the Child Tax Credit is $1,000 for each qualifying child • This maximum amount can be reduced or eliminated based on the taxpayer's: • tax liability, modified adjusted gross income, and/or filing status • The amount of the Child Tax Credit may be reduced for the two reasons stated below (and on the middle of page 26-3): • The taxpayer's tax liability less (minus) the majority of the non-refundable credits is less than the maximum child tax credit (remember this one is non-refundable) • MAGI is above the limit for the taxpayer's filing status • See Volunteer Resource Guide, Tab G, page G-8, Question 7 for the limits (they are also listed below) • Basically it's saying this…if for your filing status your MAGI is above the limit your credit may be reduced or eliminated • MAGI Limits (any thing over these are a credit reduction): • The taxpayers credit may be reduced if their MAGI is more than: • $110,000 and they are Married Filing Jointly • $75,000 and they are filing as Single, Head of Household or Qualifying Widower • $55,000 if they are Married Filing Separately

  7. Lesson 26: Child Tax Credit • What is the amount of the Child Tax Credit? (continued) • There are two different worksheets/publications that can be used to figure the credit depending on the taxpayer's situation • Publication 972 or the Child Tax Credit Worksheet • This Child Tax Credit Worksheet is in the Form 1040 Instructions page • Let's look through it • Publication 972 is used in the case of a Reduced Credit (in your Publication 4491-W page 232-233) • Everyone can use this worksheet but if qualified to do so the taxpayer should use the other simpler worksheet • The Questionnaire on page G-8 of Tab G of the Volunteer Resource Guide should be used to determine which worksheet must be used • Tip: TaxWise will do all of these calculations for you • the important part is that you get the right information from the taxpayer to enter into TaxWise • You also need to be able to explain to the taxpayer why their credit has been reduced or eliminated so you do need to understand the rules and understand when a credit is reduced/eliminated • What is MAGI? • For most taxpayer's it’s the same as AGI but for some taxpayers there may be "modifications – additions or subtractions" from AGI to arrive at MAGI • Let TaxWise or the Tax Worksheet/Publication/Form lead you through these types of calculations…if you enter the information right you'll get the right calculation • Question: If a taxpayer has a tax liability of zero can they take the Child Tax Credit? • Do Exercises on Page 26-4.

  8. Lesson 26: Child Tax Credit • How to determine the taxpayer's eligibility for the credit and how to calculate the credit • We already discussed the Interview Techniques to use that are in Tab G (page G-7) of the volunteer resource Guide • This interview is determining eligibility for both the Child Tax Credit and the Additional Child tax Credit which we will discuss next • Let's review the basic things that need to be verified about the child on page 26-5 of Publication 4491 • In computing the credit make sure the correct worksheet is used (based on the interview) • TaxWise will determine eligibility and calculate the credit for you provided • You entered the correct information in the dependents/non-dependents section • The return is completed through a certain line (which we haven't gotten to yet) • HOWEVER: Always check the calculated credit and make sure it seems right…..double check the worksheet used to computer the calculation • Don't assume the computer is always right…a mistake in input can result in an inaccurate credit…the computer knows no better • Where is the Child Tax Credit Reported on the Form 1040? • Line 52 in the Tax and Credits Section • This is a DIFFERENT Section than where the Additional Child Tax Credit will be reported

  9. Lesson 26: Additional Child Tax Credit • What is the Additional Child Tax Credit? • Some taxpayers that get less than the full amount of the Child Tax Credit may qualify for the Additional Child Tax Credit • The Additional Child tax credit is a refundable credit so unlike the Child Tax Credit it could give the taxpayer a refund if they don't owe tax • General Information on the Additional Child Tax Credit • The qualifying child rules are the same • It allows eligible taxpayers to claim up to a $1000 Additional Child Tax Credit for each child • Any allowable amount of the Child Tax Credit claimed must be subtracted • So this means the maximum per child for both credits combined is $1000 • What are the Eligibility Rules? • This credit is generally based on the lesser of: • 15% of the taxpayers taxable earned income that is over $8,000 • NOTE:This amount is different than that in your book! See the supplement – this was CHANGED due to the Emergency Economic Stabilization Act! • So taxpayers with earned income of less than this amount are generally not eligible for the additional credit • The amount of the unused Child Tax Credit (caused because the taxpayer's liability was less than the allowed credit) • The general rules for eligibility for the Additional Child Tax Credit are on page G-6 in Tab G of the Volunteer Resource Guide • Look at the example on page 26-6

  10. Lesson 26: Additional Child Tax Credit • What are the Eligibility Rules? (continued) • Are there any Exceptions to the General Eligibility Rules? • Yes • Exception: Taxpayers who have three or more qualifying children and have taxable earned income less than $8,000 (change this number in your book) may still qualify for the Additional Child Tax Credit IF: • They had Social Security or Medicare taxes withheld from their pay • They were self employed and paid self-employment tax • The paid tax on tips not reported to their employer • Form 8812 • This is the form used to calculate the Additional Child Tax Credit • Let's take a look at it • Part II of the form deals with the exception above • The Form is on Page 214 in Appendix C of your Publication 4491-W

  11. Lesson 26: Additional Child Tax Credit • How is the Additional Child Tax Credit Calculated? • Form 8812 is used to calculate the Credit • TaxWise verifies the taxpayer's eligibility and calculates the Amount • Where does the final Tax Credit show? • On the Form 1040 it is on line 66 in the PAYMENTS section • Note this is a different section than where the Child Tax Credit showed up • How to Avoid Common Errors Associated with the Child Tax Credit and Additional Child Tax Credit • Make sure each child is eligible • This means to be very thorough in the interview • Note any unusual situations on the intake/interview sheet • These are things that need to be looked at and double checked in quality review • An example of something to make note of would be if a dependent cannot be claimed but the nondependent child is still eligible for the child tax credit • Remember a Form 8901 needs filled out in this situation

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