Understanding the Child and Other Dependent Tax Credit

Many federal employees may not be aware that they could be eligible to claim on their 2023 federal income tax returns the Child Tax Credit (CTC) of up to $2,000 per qualifying child. A tax credit is more valuable than a tax deduction in the sense that it is a “dollar-for-dollar” reduction in an individual’s federal tax liability. On the other hand, a tax deduction reduces the amount of an individual’s income that is subject to federal income tax.

This column discusses the CTC and the equivalent “other dependent” tax credit (ODC).

The CTC is a nonrefundable tax credit that is limited to an individual’s regular tax liability plus the alternative minimum tax (AMT) liability. A nonrefundable tax credit is a reduction in the amount of income tax that an individual owes. It can reduce the amount owed to zero, but no further. In other words, when it comes to a nonrefundable tax credit an individual forfeits any credit that exceeds the total amount of taxes owed.

By contrast, a refundable tax credit results in a refund from the IRS if the tax credit reduces the individual’s federal tax liability to a number below zero.

Paid Preparers Due Diligence Checklist

Those employees who are eligible for the CTC and who use a paid tax preparer to prepare their federal income tax returns should make sure that their tax preparer completes IRS Form 8867 (Paid Preparer’s Due Diligence Checklist), if the CTC (or the ODC, see below) is claimed on the return. Form 8867 is filed as part of Form 1040.

Who is a “Qualifying Child” for the Purpose of Claiming the CTC?

The definition of a “qualifying child” for the purpose of claiming the CTC is the same definition as that for the tax dependency exemption. Although the Tax Cut and Jobs Act of 2017 (TCJA) eliminated the dependency exemption deduction for the years 2018-2025, the rules regarding claiming a child as a tax dependent have not changed. To claim a child for the purpose of the CTC, the child:

(1) Must be under age 17 throughout the year for which the CTC is claimed;

(2) Must be a US citizen, resident alien or national; and

(3) Must be claimed as a tax dependent and have a valid Social Security number for employment purposes. An eligible individual claiming the CTC based on a qualifying child must include the child’s Social Security number on his or her federal income tax return.

Adjusted Gross Income Phase-Out

The $2,000 CTC per child is phased out by $50 for each $1,000, or a fraction thereof of modified adjusted gross income (MAGI) above the beginning phase-out amount. The MAGI amount in which the CTC is completely phased out is $400,000 for individuals who file as married filing joint and $200,000 for all other tax filers (single, head of household, married filing separate).

To calculate the credit individuals complete Part I of IRS Schedule 8812 (Credits for Qualifying Children and Other Dependents) (see below). For most individuals, the CTC is equal to the smaller of

(1) $2,000 multiplied by the number of qualifying children less the applicable phase-out amount; or

(2) The regular tax liability plus AMT liability reduced by the foreign tax credit and other nonrefundable credits.

Other Dependent Credit (ODC)

For tax years beginning after December 31,2017 and before January 1,2026, a $500 tax credit is allowed for each tax dependent of an individual other than a qualifying child. The nonrefundable credit applies to a child aged 17 or 18, a child who is full-time student between the ages of 19 and 24, a disabled child of any age, or a qualifying relative who may be claimed as a tax dependent. The individual claimed as the “other dependent” for the purpose of the ODC cannot be used as a basis for the CTC and must be a US citizen, a US national or a US resident.

Additional Child Tax Credit

A portion of the child tax credit is refundable for certain individuals. Individuals complete Part II-A of Schedule 8812 (see below) to compute the refundable portion of the credit (“additional child tax credit”).

The additional child tax credit is the smaller of:

(1) The amount of the child tax credit remaining after reducing the regular tax and the alternative minimum tax to zero; or

(2) 15 percent of the individual’s earned income (salary or wages) in excess of $2,500.

Federal employees who have questions about the CTC and the ODC (in particular, their eligibility to claim either or both tax credits on their 2023 federal income tax return) are advised to contact a knowledgeable tax professional.