Question

. Mrs. A is an unmarried taxpayer with one qualified child, age 15, living in her home. Her AGI is $40,000 and she does not itemize deductions. Compute Mrs. A’s tax liability. (Take into consideration the child tax credit but ignore the earned income tax credit.)

8. Mr. and Mrs. OP have two dependent children. They paid $7,200 wages to a day care center to care for the children. Mr. and Mrs. OP file a joint return. In each of the following cases, compute their dependent care credit.

a) One child is age 10 and the other is age 15. Mr. OP’s earned income is $75,000 and Mrs. OP has no earned income. Their AGI is $81,300.

b) One child is age 2 and the other is age 6. Mr. Op’s earned income is $45,000 and Mrs. OP’s earned income is $28,000. Their AGI is $81,300.

9. On March 31, Mr. R quit his job with MT Inc. and began a new job with PK Company. His salary from MT Inc. was $53,900 and his salary from PK Company was $90,000. Compute his excess payroll tax withholding credit. (Assume a social security rate of 6.2% and a wage base limit of $137,700.)

10. Mr. and Mrs. K’s AGI was $23,000. Their federal income tax withholding was $850. They had no itemized deductions and two dependent children, ages 14 and 15. If they are entitled to a $5,828 earned income credit, compute their tax refund, including the. Include the refundable child tax credit, the earned income tax credit, and the federal income tax withheld in computing the tax refund.

Answer 1

Taxpayers can claim a child tax credit (CTC) of up to $2,000 for each child under age 17 who is a citizen. The credit is reduced by 5 percent of adjusted gross income over $200,000 for single parents ($400,000 for married couples). If the credit exceeds taxes owed, taxpayers can receive up to $1,400 of the balance as a refund, known as the additional child tax credit (ACTC) or refundable CTC. The ACTC is limited to 15 percent of earnings above $2,500 (figure 1).

For the most part, the CTC is not indexed for inflation. The exception to this is the amount of the credit families with children under 17 can receive as a refund. This amount (which was set at $1,400 in 2018) will increase annually with inflation until it becomes equal to the full value of the credit ($2,000). In 2020, the refundable portion of the credit remains at $1,400. Inflation has been insufficient to bump the refundable portion up to $1,500, the lowest increment allowed, by law.

Starting in 2018, a $500 credit was made available to dependents who were not eligible for the $2,000 CTC for children under 17 (figure 1). Before 2018, these individuals would not have qualified for a tax credit but would have qualified for a dependent exemption, which was eliminated by the 2017 Tax Cuts and Jobs Act (TCJA). Dependents eligible for this credit include children ages 17–18 or those 19–24 and in school full time in at least five months of the year. Also included are older dependents—representing about 6 percent of dependents eligible for the CTC.

After 2025, the CTC is scheduled to revert to its pre-TCJA form. At that point, taxpayers will be able to claim a credit of up to $1,000 for each child under age 17 and the credit will be reduced by 5 percent of adjusted gross income over $75,000 ($110,000 for married couples). If the credit exceeds taxes owed, taxpayers will be able to receive the balance as a refund (the ACTC). The ACTC will be limited to 15 percent of earnings above $3,000.

IMPACT OF THE CTC

The Tax Policy Center estimates that 90 percent of families with children will receive an average CTC of $2,380 in 2020 (the average credit can exceed the maximum per child credit because families can have more than one child). Families with children in all income groups will benefit from the CTC, but families in the lowest income quintile are least likely to benefit from the credit because more of them will not have sufficient earnings to qualify for the credit. Just under three-quarters of families in the lowest income quintile (the bottom one-fifth of the income distribution, ranked by household income) will be eligible for a CTC, receiving an average benefit of $1,280. The average credit is the smallest for this group because low-income families are most likely to be limited to the refundable portion of the credit, which is capped at $1,400 rather than the full $2,000 limit for the nonrefundable credit (figure 2).

The percentage of families with children receiving the credit and the average credit received are higher among moderate- and middle-income families. Almost 94 percent of families with children in the second income quintile will receive a CTC as will almost all families in the third and fourth income quintiles (98 and 99 percent, respectively). The proportion of families with children receiving a credit drops to 88 percent in the highest income group because of the income limits (figure 2).

The CTC has a significant impact on the economic well-being of low-income families with children. If the official estimate of poverty counted the CTC as income (including the refundable portion), 4.3 million fewer people would have fallen below the federal poverty line in 2018, including about 2.3 million children. Counting the credit would have also reduced the severity of poverty for an additional 12 million people, including 5.8 million children (Center on Budget and Policy Priorities 2019).