The Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC) are not mutually exclusive. If you meet the requirements for dependent children and income, you can claim both on your tax return. If you are unable to claim the full amount of the CTC, you can claim the Additional Child Tax Credit (ACTC) to receive a portion of the remaining credit amount. The EITC is also available to individuals without children.
The Dependent Child Test
Both the CTC and EITC use a six prong test to determine if a child is a dependent. Failure to satisfy one of the criteria results in disqualification from eligibility to claim the credit.
- Age: The CTC requires that the child be age 16 or younger. The EITC allows the credit to be claimed for dependents no more than 19 years old, or 25 if the child is a full-time student.
- Relationship: The child must be the claimant’s biological or adopted son or daughter, stepchild, foster child or their biological brother, sister, stepbrother or stepsister. Descendants of relatives are included in the criteria, meaning that grandchildren, nieces or nephews can also qualify.
- Support: The child must not provide more than one-half of their own support.
- Dependent: The claimant must state that the child is a dependent on their tax return. This means that the child cannot file a tax return in which they claim that they are not a dependent of someone else.
- Citizenship: The child must be a U.S. citizen, national or resident alien.
- Residence: With a few exceptions for deceased or kidnapped children, the child must live with the claimant for more than six months of the year.
The only difference between the dependent tests for the two credits is the age requirement. Additionally, the EITC is available to individuals without dependents.
The Earned Income Tax Credit Explained
The EITC is a tax credit offered to low-income individuals. To qualify for the credit, the taxpayer must not make more than the maximum allowed amount. They do not need to have a dependent child, but the amount of the credit increases if they do. The specific amount of the credit depends on the claimant’s earnings. Each year the IRS sets new income limits and credit amounts. The claimant themselves must be employed, but they may be self-employed. If the credit amount reduces the taxpayer’s total tax liability below zero they are entitled to a refund of the remaining amount.
The Child Tax Credit Explained
The CTC provides taxpayers with dependent children with as much as $1,000 tax credit per child. The credit is only claimable on forms 1040, 1040A or 1040NR. The total amount of credit depends on the taxpayer’s income, reducing after the taxpayer exceeds the allowable maximum income:
- Married Filing Jointly: $110,000
- Married Filing Separately: $55,000
- All Other Taxpayer Statuses: $75,000
The credit for taxpayers earning more than the maximum is reduced by 5 percent of their excess earnings. For example, to determine the credit for a married taxpayer filing separately with an income of $60,000, multiply the $5,000 of excess income by 5 percent (.05). The result is $250.00. Next, subtract the $250 from the maximum $1,000 credit allowed. The result, $750.00, is what the taxpayer can claim for a dependent child.
Unlike the EITC, however, the CTC is not a refundable credit. This means that any amount of the credit remaining after the taxpayer eliminates their tax liability altogether is not returned to them. Instead, the taxpayer can claim the Additional Child Tax Credit on Form 8812. The ACTC refunds 15 percent of the excess amount of the CTC to the taxpayer.
Claiming the EITC, CTC and ACTC
The EITC and CTC are not mutually exclusive. This means that you can claim both on your tax return, provided that you meet the six prong criteria test for each credit. Remember that each carries a different dependent age maximum. Additionally, if you do not receive a refund for the CTC, you can claim the ACTC.
Some experts state that you should never receive a refund. This advice, however, rests on the fact that financial experts see any refund as an overpayment to the government. Because overpayments mean that you did not have control over your money for the last year because it was in IRS hands, they view refunds as an indication that the taxpayer did not properly calculate their tax liability.
Experts do not state that you should not claim tax credits or request refunds when you are entitled to them. Therefore, if you qualify for the EITC, CTC or ACTC, complete the proper forms to claim them on your return.