Back to Basics Part XXVII – Schedule 8812 – Child Tax Credit

Originally published in the Cedar Street Times

November 13, 2015

I believe the IRS was having an off-day when they created the “Schedule 8812 – Child Tax Credit.”  First, why did they call it a “Schedule?”  Anyone who grew up with Sesame Street during the past 40 years inevitably knew the song, “One of these things is not like the others…” and then you would have to pick out the one thing that was different on the TV screen.  Okay, it’s time for you to play: Form 1045, Form 2106, Form 3903, Form 6251, Schedule 8812, Form 8829, Form 9465.  Did you figure it out?  In my tax software there are well over 100 four-digit forms to choose from, and I believe the 8812 is the only one called a “Schedule.”   Schedules, on the other hand, all start with letters, such as Schedule A, Schedule B, Schedule C, etc.

The second reason I think the IRS was having an off-day, is that the name of the form – “Child Tax Credit,” is somewhat of a misnomer.  There are two related, but distinct credits, the “Child Tax Credit,” and the “Additional Child Tax Credit.”  For the vast majority of people the Child Tax Credit is determined on the Child Tax Credit worksheets in Publication 972.  The Additional Child Tax Credit is the one generally figured on the double poorly named, “Schedule 8812 – Child Tax Credit.”

So what are these credits and how can you get them?  The child tax credit is a nonrefundable tax credit up to $1,000 per child, and the Additional Child Tax Credit is a refundable tax credit that may be available if you qualified for the child tax credit but could not use some or any of the credit because you did not owe much or any tax.  Whenever you hear of a refundable tax credit, think fraudulent returns – because lots of them are filed whenever scammers figure they can get something for nothing.  Also remember, that tax credits are much more valuable than tax deductions.  Credits are a dollar-for dollar reduction of tax, whereas deductions just reduce the income upon which the tax is calculated.  So credits could be three to ten times more valuable than deductions depending on your tax bracket.

I know many of you are thinking, “What a deal! At an annual $1,000 a pop, where can I get more kids?”  Well, you can certainly birth them, adopt them, or foster them (through a court or qualified agency).  You could also get one or both of your parents to have another child and give it to you, or you could even have a step-parent give you his or her children to raise, or any of the decedents of these two categories.  The reverse is also true…parents, you can sweet talk your kids into having their own children to give to you, or if you are already a grandparent, just keep the grandkids the next time they are dropped off and don’t give them back!  There are so many wonderful options!  Please make sure the children are under 17; make sure they are U.S. citizens, U.S. nationals or U.S. resident aliens; and make sure that you meet all the tests to claim them as dependents as well.

You also cannot make too much money in order to qualify for the credit.  If you are Married Filing Joint you start to lose the $1,000 per child tax credit when your combined incomes hit $110,000.  By $130,000 it has been ratably phased-out.  If you are filing head of household, your phase-out range for the credit is $75,000 – $95,000 of modified adjusted gross income.

As mentioned earlier, if you qualify for the child tax credit, but you have more credit than tax owed to offset, you may be able to pick this difference up through the Additional Child Tax Credit and actually get a refund for money you never paid in to begin with.  In order to qualify for the Additional Tax Credit you do need to work.  The calculations are such that you need to have at least $3,000 of earned income (not investment or retirement income) to get anything.  You need to have about $10,000 of earned income to max out the credit if you have one child, and approximately an additional $7,000 for each additional child in order to max out the $1,000 per child credit.

There are lots of nuances to these rules depending on your circumstances, but they are fairly well addressed in the worksheets and the instructions when you actually go to fill them out.  Again, Publication 972 houses the Child Tax Credit worksheets (about 5-6 pages of worksheets) to see if you qualify for the Child Tax Credit.  Then, if you cannot utilize all of the credit for which you qualify due to income tax liability limitations, then you go to Schedule 8812 Child Tax Credit to see if you can qualify for the refundable Additional Child Tax Credit.

The Schedule 8812 is only 1-1/2 pages long.  Part I of the schedule is only used if your children do not have Social Security Numbers, and have ITINs instead.  Part II is the section where most people will go to calculate the Additional Child Tax Credit.  Part III is a special section for super humans that have three or more qualifying children.

In the meantime, I will be eagerly awaiting to see if a reader can enlighten me on some history that might explain the anomaly naming convention of Schedule 8812 – Child Tax Credit!

If you have questions about other schedules or forms in your tax returns, prior articles in our Back to Basics series on personal tax returns are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

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