Child tax credit
Taxation An aspect of fiscal policy
A child tax credit is the name for tax credits issued in some countries that depends on the number of dependent children in a family. The credit may depend on other factors as well: typically it depends on income level. For example, in the United States, only families making less than $110K per year may claim the full credit. In many US counties the median family income is more than $110K per year, so the income level of the family is a larger consideration than the number of children. For example, in 2009, the majority of families in Loudoun County made $110,600 or more and would therefore not receive the full credit. Similarly, in the United Kingdom the tax credit is only available for families making less than £42,000 per year.
Germany has a programme called the "Kinderfreibetrag" which functions as a tax credit.
In the United Kingdom, a family with children and an income below about £42,000 can claim child tax credit on top of child benefit. The tax credit is "non-wastable" - i.e. it is paid whether or not the family has a net tax liability - and is paid in or out of work. Higher rates are paid for disabled children. It is integrated with the working tax credit, which also provides support for childcare costs.
In the tax year 2009/10, for those with a household income below £58,000 this is worth £545 a year as a family element (£1,090 if they have a baby under 1 year old, as you get an extra £545). For those with low incomes, there is an additional £2,235 per child per year, and this is tapered away at a rate of 39% as earnings increase above £16,040 per year.
All income is tested for the Credit, so a couple who both work and have children, will have both salaries taken into account.
There are several different credits that a taxpayer can claim in the United States. One of the most common is the Child Tax Credit, provided by 26 U.S.C. Sec. 24. The Child Tax Credit reduces tax liability for families making less than $130,000. After $110,000 it phases out at the rate of 5 cents for each additional dollar earned above $110,000.
For a relatively small number of families, the child tax credit will exceed their tax liability. In many such cases, the unused portion of the child tax credit is refundable as the "additional child tax credit." The amount that is available as a refund depends on the amount of earned income, and in certain circumstances the amount of social security and medicare taxes paid. Refer to IRS form 8812 and instructions.
The child tax credit is available to taxpayers who have a “qualifying child” within a family making less than $130K per year. The full credit is only available if the family makes less than $110K per year. A person is a “qualifying child” if he or she has not attained the age of 17 by the end of the taxable year and meets the requirements of 26 U.S.C. Sec. 152(c). In general, a qualifying child is any individual for whom the taxpayer can claim a dependency exemption and who is the taxpayer’s son or daughter (or descendent of either), stepson or stepdaughter (or descendent of either), or eligible foster child.
The per-child amount was originally set at $400 in 1998, and has since increased to $1,000. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended this $1,000 cap through the end of 2012. If the law is not changed, the maximum amount will return to $500 per-child in 2013. However, this credit is phased-out for taxpayers above certain thresholds defined in 26 U.S.C. Sec. 24(b)(2). If the taxpayer’s taxable income is over the threshold, the total credit decreases by $50 for each $1,000 (or part thereof) over the threshold.
A taxpayer’s total tax credit is refundable to the extent of the greater of 15% of the taxpayer’s earned income over $3,000 (new for 2009) (an amount adjusted for inflation IAW 26 U.S.C. Sec. 24(d)(3)) or, as long as the taxpayer has three or more qualifying children, the excess of social security taxes paid over earned income credit, all subject to the income threshold. Unless a married couple files jointly, a qualifying child will be treated as such for the purpose of the Child Tax Credit for the taxpayer who is the child’s parent, or if not a parent, the taxpayer with the highest adjusted gross income for the taxable year in accordance with 26 U.S.C. Sec. 152(c)(4)(A). If more than one parent claims the child and do not file a joint return, the child will be treated as a qualifying child of the parent with whom the child resided for the longest period during the taxable year, and if the child resided with each parent equally, with the parent who has the highest adjusted gross income in accordance with 26 U.S.C. Sec. 152(c)(4)(B).
- Taxation in the United Kingdom
- UK labour law
- Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials, 2nd Edition (St. Paul: Thomson/West, 2007)
- IRS Publication 972 (2007), Child Tax Credit
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