| Tax credits / Child tax credit |  |
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The child tax credit allows you to
claim a credit of $500 for each qualifying child. Thus, for example, a
taxpayer with four qualifying children will be entitled to a credit of
$2,000. A qualifying child is an individual under the age of 17 for whom
you can claim a dependency exemption and deduction and who is your child
or other direct descendent, or a stepchild or eligible foster child.
Although you must be entitled to a dependency deduction for the child,
that deduction ($2,900 for 2001) isn't reduced or otherwise
modified because of the child tax credit. The credit is phased-out for certain
higher income taxpayers. Specifically, the amount of the credit
allowable is reduced by $50 for each $1,000 (or part of $1,000) of
modified adjusted gross income (generally, the dollar amount shown on
the last line of page 1 of your individual income tax return) above a
threshold amount, i.e., $110,000 on a joint return, $75,000 for single
filers and heads of household, and $55,000 for married individuals who
file separate returns. This means, for example, that a married couple
filing jointly who have one qualifying child are entitled to a credit of
$450 if their modified adjusted gross income is more than $110,000 but
not more than $111,000. They lose the credit completely if their
modified adjusted gross income is more than $119,000.
If the otherwise allowable child tax
credit is more than the amount of income tax you owe, the excess may be
refunded under a formula that takes into account your share of social
security taxes (FICA and one-half of self-employment tax) as well as the
earned income credit. To the extent that the child tax credit will reduce your 2001 income tax liability, you may want to consider a corresponding reduction in your wage withholding in 2001. You can do this by filing a new Form W-4, Employee's Withholding Allowance Certificate, with your employer. The personal allowance worksheet that accompanies the 2001 Form W-4 permits you to claim one additional withholding allowance for each eligible child if your total income will be between $18,000 and $50,000 ($23,000 and $63,000 if married). If your total income will be between $50,000 and $80,000 ($63,000 and $115,000 if married), you can claim one additional withholding allowance if you have two eligible children, two additional allowances if you have three or four eligible children, and three additional allowances for five or more eligible children. This can translate into an increase of $15 or more per week in your take-home pay. |
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