The Child Tax Credit is one of the most important tax benefits available each year to parents because it directly reduces the tax they pay by a significant amount. Many parents get used to claiming their dependents each year and taking advantage of a dependent tax credit or other tax benefits. It might never occur to them not to do so. Believe it or not, there are some situations where you may want to forgo claiming your children as dependents, so you and your kids can have a greater tax benefit.
Before you can start claiming dependents, you need to understand who qualifies as a dependent. If you're claiming a child as a dependent, the child must be a part of your family. They also need to live with you for at least half of the tax year. There are exceptions to this rule, for example, adult children who are going to school and living more than half of the year in a student dormitory.
Here's an important stipulation. The dependent child can't be supporting themselves financially. If your child earns more than $4,400 during the tax year, they have to file their own tax return. And, you can't claim them as a dependent, which means you can't claim the dependent tax credit. If your children file a joint tax return with someone else, you can’t claim them as a dependent. They also have to have U.S. citizenship or be a U.S. resident alien, U.S. national or a resident of Canada or Mexico.
A child can also be claimed as a dependent if they are permanently and totally disabled.
There is also an age test your child has to pass. The child must have been under age 19 at the end of the tax year, or be under age 24 at the end of the tax year if they're a student. For the IRS to consider your child a student the child must be:
If this sounds like your child (or children), you can claim them as a dependent (or dependents). Now you just have to figure out if you should.
The Child Tax Credit is one pro of claiming your child as a dependent. It's a tax benefit that every American taxpayer can claim for every qualifying dependent child they have. It was designed to help working families by directly decreasing the tax liability of the taxpayers in the family. This credit is not to be confused with the Child and Dependent Care Credit, which does not affect taxpayers in the same way.
Different from a tax deduction, which lowers a person's taxable income, a tax credit reduces the overall amount of tax a person is required to pay, dollar for dollar. Like all tax credits, the Child Tax Credit is a direct reduction of the amount of income tax owed, and it is one of the most widely used credits, along with the Earned Income Credit, the American Opportunity Credit and the Savers Tax Credit.
Tax credits can be refundable or nonrefundable, which means they have the ability to either lower the tax you owe to $0, or actually result in a payment in the form of a refund. How does that work? Let's say you owe $500 in taxes, and you receive the Lifetime Learning Credit for $2,000. Because the amount of the credit is $500 or more, your tax bill would be reduced to 40.
But, if your tax bill is $500, and you take the Child Tax Credit, which provides $2,000 and is refundable, you would receive a refund of $2,000 minus $500, or a total of $1,500. Just make sure you use IRS Form 8812 at tax time to claim the credit.
If your child goes to school at a university, they might be wondering, "can I be claimed as a dependent," and the answer is yes. If you do claim them as a dependent, there's a good chance you can qualify for certain education tax credits, like the American Opportunity Tax Credit and the aforementioned Lifetime Learning Credit.
It's important to note that another way to reduce the tax you pay is by reducing your taxable income by deducting business expenses such as home office expenses. Unlike tax credits, which reduce the amount of tax you pay overall, business expense deductions reduce the amount of your income that can be taxed.
But, tracking all of the business expenses you can deduct can be tricky, which is why FlyFin uses A.I. to connect to your account statements and track every possible tax write-off automatically.
There are clearly more benefits than drawbacks to claiming your child as a dependent, but one clear situation in which you will not want to do so is if your income is high enough that you can't qualify for the education credits your college student dependent would allow you to qualify for.
If your child is a student, they probably have an income that's low enough for them to qualify for education credits, and it's very likely that those credits would amount to more savings for them than the Child Tax Credit would for you if you claimed them as a dependent. So, even though the Child Tax Credit is one of the most widely used by Americans when they claim their children as dependents, there are still times when it might be best not to claim your child as a dependent. It's always best to consult with a tax professional for advice on claiming children as dependents.
FlyFin CPA Team
With a combined 150 years of experience, FlyFin's CPA tax team includes tax CPAs, IRS Enrolled Agents and other tax professionals, offering users the most comprehensive tax advice and preparation.