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Claiming the Child Tax Credit: Rules and exceptions

Tax tips for parents
Tax tips for parents or guardians of children 01:55

Parenthood isn't cheap. But come tax time, parents and guardians of kids can take advantage of a number of tax savings that aren't available to the general public.

The Child Tax Credit is the best-known of these, since it doubled in size recently with the passage of the Tax Cuts and Jobs Act of 2017. But parents can also take advantage of tax perks for some child-care expenses — including for adult kids.

Child Tax Credit

This tax credit can reduce your liability up to $2,000 per child. It can also give you back up to $1,400 even if you had no tax liability, making it one of the most valuable tax credits. 

Your 2020 tax return: Everything you need to know 03:01

Some 22 million households, or about 1 in 7 taxpayers, claimed the Child Tax Credit in 2017, the most recent year for which IRS data are available. The figure last was likely much higher, since the late-2017 tax law changes more than doubled the maximum income someone could earn and still qualify for the credit.

The IRS lists seven criteria for a child to be eligible for the credit:

  • The child needs to be a U.S. citizen or legal resident
  • She should be no older than 16 at the end of the tax year
  • The child needs to be your child, foster child, sister or brother, or a descendant of one of them (such as a niece, nephew or grandchild)
  • You need to claim the child as a dependent on your tax return
  • The child cannot provide more than half her own living expenses
  • The child can't file a tax return as part of a married couple
  • The child should have lived with you for more than half the year

The residency requirement is structured so that a single child can't be claimed by more than one taxpayer for a given year. But its complexity can lead to confusion, especially in multi-generational households, said Nina Olson, founder of the Taxpayer Rights Center and the National Taxpayer Advocate from 2001 to 2019.

"Because of the dynamics of the American family, children move back and forth between separated parents; they may be living with grandparents; they may be living with unmarried parents," Olson told CBS News.

"If you're just caring for a child and it's your cousin, that's not necessarily going to qualify you" for the tax credit, she explained. "That's where you really get into people claiming something that maybe makes sense, but doesn't qualify under the law."

What about divorce?

"If you have one situation that can cause problems, it's children of divorced parents," said Mark Jaeger, director of tax development at TaxAct. "Sometimes they may not understand who should be claiming what child, and it causes some complexities." 

A divorce decree will usually spell out who can claim the child, but individual families can make decisions differently, Jaeger notes. Sometimes parents will alternate years, with one claiming the child tax credit in odd years, and the other claiming them in even years. Or, if two children are involved, one parent can claim each child.

Still, it's not always foolproof.

"I've had situations in my practice where I've had parents come in and complain to me that, even though they're legally entitled to claim a child on their tax return, their former partner has claimed the child and gotten extra tax refunds," said Jonathan Medows, a CPA based in Manhattan. "It created a fight with the IRS to get their refunds." 

For that reason, Medows tell clients claiming the credit to file as early as possible.

Tax law changes you should know about 02:38

If your dependent is 17 or older

Children who are 17 or older won't qualify you for the full Child Tax Credit, but you can get up to $500 per person through a dependent care credit. You can claim an adult child or an aging parent, for instance — as long as that person meets the IRS' definition of a dependent.

Child-care costs

In addition to the Child Tax Credit, working parents can deduct some of the cost of child care. If you paid someone to care for your kids so that you could work or look for work, you likely qualify. The deduction limit is $3,000 for a single child, or $6,000 for two or more children.

A quick reminder of the difference between tax credits and tax deductions: Credit reduces the amount you owe in taxes dollar-for-dollar, making them generally more valuable than deductions. A deduction reduces the amount of your income on which you have to pay taxes, so its value to you will depend on what tax bracket you fall into.

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