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 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

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) 1. The child must be under age 17 at the end of the tax year 2. The child must be a U.S. Citizen, U.S. National, or resident of the United States 3. The child must be claimed as the taxpayer's dependent 4. The child must have a certain relationship with the taxpayer  See #4 on page G-6 under Tab G of the volunteer resource guide 5. The child can not provide over half of his or her own support 6. 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

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

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

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

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 )  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.

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

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

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

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