The Child Tax Credit: What It Is and How Married or Divorced Couples Can Maximize It

At One Life Financial Group, we are in a heavy tax season, having many conversations with clients and their accountants about strategies to minimize their tax bills for 2023 and 2024. We’re encouraging clients to talk to their accountants about maximizing potential tax credits.

So, in today’s post, we are exploring three things.

First, what is the child tax credit, and who’s eligible for it? The second is steps to maximize that potential credit if you’re married with children. Lastly, we are covering a creative strategy that some divorced parents have worked together on to maximize the credit for the benefit of their situation and their children.

If you’d rather watch the video version of this post, please click here.

#1: What is the child tax credit, and who is eligible for it?

There are several criteria for this credit. Check out this link to review them, or talk to your accountant. Here is a quic rec

#1: The child needs to be under the age of 17 at the end of the year.

#2: The child provides no more than half of their own financial support during the year.

#3: Number three is the child must have lived with you for more than half the year.

#4: Number four, the child should be properly claimed as your dependent on your tax return. And if you’re divorced and want to give that credit to a spouse who qualifies for it (if you don’t qualify for it), you need to file form 8332 to let the other parent take that credit.

#5: Be a U. S. citizen.

If you do meet those criteria, you could be eligible for up to $2,000 per qualifying child, so that can really add up. Especially if you’re like me—I have seven children—there could be a lot of money on the table if you qualify for the credit!

For 2023, if you meet those requirements and your annual income is not more than $200,000 if you’re filing an individual return or $400,000 for a joint return, you could be eligible.

If you’re over that limit of taxable income, the credit is reduced by $50 for every $1,000. So, if you’re $40,000 over the income limit (that would be $240,000 or $440,000), you would not be eligible for a credit.

#2: Steps you can take to maximize that potential credit

If you are close to the limit of $200,000 or $400,000, depending on if you’re filing single or jointly, something that you can do throughout the year is work to lower your taxable income.

We’ll dive more into that in a separate video, but a couple of high-level quick strategies might be increasing contributions to a 401(k) plan, retirement plan, deductible IRA, charitable giving strategies, or deferred compensation. These could all lower your potential income and help you qualify for that credit.

At this time of year, before the tax filing deadline, if you are eligible to make a tax-deductible IRA contribution, that could potentially lower your income and help you qualify. If you’re a small business owner, making a profit-sharing or SEP IRA contribution could also reduce your potential taxable income if you are close to that limit.

#3: How divorced couples could potentially maximize the child tax credit

The third thing we will discuss is a creative way that divorced parents could explore to work together to maximize that credit. So, what could they do?

Let’s say that there’s a divorced couple, Bob and Betty. Let’s assume that Bob’s income is $240,000. He’s a single filer, so he qualifies for $0 out of that $2,000 credit. Bob doesn’t like this idea. In this scenario, they have twins who are three years old, so they have 14 potential years of tax credits. Now, in their divorce decree, Bob and Betty agreed to each claim one of the children, and so basically, for Bob, if his income stays there, he’s losing out on a $2,000 credit.

If the tax code stays the same, that could be over 14 years, which could be $28,000 left on the table in credits. So, Bob has an idea. He talks to his accountant, and he goes to Betty and says, Hey Betty, I’d love to help get more money in the kids’ college fund for their future. I want to give you both children to claim this year, and I would just like you to put that money into their college fund to help them secure the future. Betty thought that was a great idea, and her accountant told her she would actually get some state tax credits for making that contribution.

So, it helped the kids, it helped Betty, and if that scenario played out for 14 years straight because Betty qualified with her income and Bob did not, that could be an extra $28,000 growing tax-free in college funds. And here’s the kicker in that scenario. A new law was passed that basically says that unused 529 funds could be eligible to move to a Roth IRA. So, if the child doesn’t go to college or gets scholarships, and they qualify (there are some requirements), they could move unused funds into their own Roth IRA.

In summary, we reviewed the child tax credit, what it is, and what married and divorced parents can do to potentially maximize their potential credits.

A disclaimer for you: I’m not an accountant. I don’t give tax advice. At One Life Financial Group, we talk a lot about tax minimization strategies. So, please speak to your accountant before acting on any new strategy. If you are unsure how to minimize your tax bill this year or if you’re looking to create a plan to secure your future and need help getting started, we would love to connect with you.

You can click here to request a complimentary consultation. Happy tax season!