When tax season comes around, it’s always best to do everything you can to put yourself in the best financial position. For parents, claiming a child as a dependent is one of the simplest ways to come out ahead. The child tax credit can put money back in your pocket, helping you make ends meet and care for your family. It’s important to remember, however, that only one parent can claim a child as a dependent when the parents file separate returns. This rule is hardly an issue for married parents who file jointly, but it can cause serious problems after a divorce. By understanding the rules around the child tax credit, you can figure out the best way to deal with this situation.
What Is a Child Tax Credit?
A child tax credit is a reduction in federal taxes offered to the parents or guardians of children under the age of 17. You can claim the child tax credit for your son, daughter, foster child, or sibling, as well as the offspring of any of these relations. There is no special application required to receive the child tax credit. All you have to do is list the child as a dependent on your tax forms.
The child tax credit is meant to help lower- and middle-class families. With this in mind, the program provides little or no support to families in the upper-income brackets. For most families, the child tax credit results in a $1,000 per child reduction in the total amount of tax owed to the Federal government. This financial support goes a long way toward reducing child poverty and stabilizing families in the lower and middle classes.
In 2021, the federal government changed the dynamics of the child tax credit to account for the economic hardship brought on by the coronavirus pandemic. Instead of offering $2,000 to parents of children 17 and under, the government offered $3,600 to parents of children 5 and under and $3,000 for children ages 6 to 18. Also, half of this total was paid out on a monthly basis, leaving the other half to be received after the parent files their 2021 taxes. These pandemic-related changes only apply to 2021. In 2022, the child tax credit will return to the previous standards.
Which Parent Can Claim The Child Tax Credit?
Only one parent can claim the child tax credit for a given child. In the absence of an agreement or court order to the contrary, the parent with whom a child lives most of the time (that is, more than 182.5 days that year) is entitled to claim the child on their tax return. This parent is said to be the “custodial parent.” Any time a child lives primarily with one parent, the other parent shouldn’t claim the child as a dependent unless the parents have agreed otherwise.
In the rare case that a child spends an equal amount of time living with each parent, then the parent with the higher adjusted gross income is entitled to claim the child tax credit. This higher-earning parent is said to be the custodial parent, and the lower-earning parent cannot claim the child as a dependent on their tax return.
While the custodial parent, as determined by the abovementioned criteria, has the right to claim the child tax credit, they can also grant that right to the other parent if they choose to do so. The important thing is that the parents communicate ahead of time to decide who will claim the child as a dependent. If both parents try to claim the child, the IRS will be forced to determine themselves which is the custodial parent by performing an audit.
What Can Be Claimed?
There are multiple dependent-related items that a custodial parent can claim on their taxes. As described above, the custodial parent can claim the child tax credit, giving them $2,000 of tax savings to spend on supporting their family. The parent can also claim head of household filing status. This means they’ll have a higher standard deduction and a lower tax rate than they would otherwise have. If you’re taking care of your child for most of the year, be sure to claim this benefit.
Raising a child often requires paying for expensive childcare over the course of many years. Luckily, these childcare expenses can usually be claimed as an itemized deduction on your tax return if you’re the custodial parent. That means all those hours of daycare or preschool will at least help lower your federal tax burden.
A custodial parent may also be able to use their federal tax forms to claim the earned income credit. This is a refundable credit that the government uses to support people with low or moderate incomes. The number of children you claim as dependents can affect the total size of your earned income credit. That’s another reason why it’s always nice to be able to claim your child as a dependent.
If you’re the custodial parent of your child, you can also deduct up to $4,000 in expenses associated with the child’s education from your taxable income. These education-related expenses can include more than just tuition or fees; books and supplies are also deductible expenses. That’s why it makes sense to keep track of school-related costs over the course of the year. Having documentation of these expenses on file will make it easier to get the full deduction you deserve.
It’s worth remembering that you can only make these claims on your tax forms if you’re the custodial parent as determined by the IRS. To review, you are considered the custodial parent if the child spends more time living with you than with the other parent. This categorization is meant to help the parent who is expending the most resources in order to raise the child. If you’re raising the child primarily in your home and spending your income on their upbringing, then you’re the one who receives the child tax credit and other related benefits–even if the other parent may be paying child support.