One of the misunderstood factors in preparing personal income tax returns is the child tax credit. A common error is failure to claim the credit by taxpayers who are entitled to receive it. Another common error is claiming of the credit by taxpayers who are not entitled to it.
Taxpayer confusion is especially prevalent in high population states, such as California, where families with children are common. CA enrolled agents offer essential expertise to untangle these problems by deploying information obtained in their tax continuing education.
Addressing tax credits is an important function of tax professionals with an EA license. Keeping up with legislative changes involving the child tax credit is a focus of EA continuing education.
The child tax credit is the most widely available benefit for families with children. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) doubled the credit from $500 to $1,000 per child. EGTRRA also made the credit available to more families as an additional refund. However, these provisions are scheduled to expire for 2011 unless Congress extends at least parts of EGTRRA. While the credit reverts to $500 per child for 2011, a $1,000 credit is still available for 2010 tax returns.
The child tax credit is claimed for taxpayers with children under age 17. The maximum credit of $1,000 per child is reduced by 5 percent of adjusted gross income over $75,000 for single parents or $110,000 for married couples filing joint tax returns.
Taxpayers can receive as a refund the amount by which the credit exceeds tax liability. However, the refundable portion under EGTRRA is limited to 15 percent of income over a threshold. The American Recovery and Reinvestment Tax Act of 2009 reduced this threshold to $3,000 for 2009 and 2010. Under EGTRRA, the 2009 threshold would have been $12,550.
Before EGTRRA, only families with at least three children were entitled to a refund of the child tax credit, which had to exceed their Social Security and payroll taxes minus their Earned Income Tax Credit. The expiration of EGTRRA will cause these provisions to return. EGTRRA made the child tax credit refundable for all families with children and reset the income threshold.
The refundable child tax credit complicates tax filing. This is especially true for larger families who may calculate their credit under both the rules that existed before and after EGTRRA.
The only part of the child tax credit that is indexed for inflation is the refund threshold. Therefore, families must earn more every year in order to have any refundable credit. The temporary lowering of the threshold alleviated this situation. Enrolled agents have therefore benefited more families with knowledge about tax credits gained from EA CPE.
