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Child Tax Credit

Eligible taxpayers may claim a tax credit (that is, a direct offset against income tax) for each qualifying dependent child under age 17. For taxpayers whose tax liabilities are not high enough to take full advantage of the credit, the law allows a refund of any unused child tax credit. The credit is refundable to the extent of 10% of the taxpayer’s earned income in excess of $10,500 (in 2003; subject to future inflation adjustments). In 2005, the refundable percentage increases to 15% of excess earned income. (A special refund rule applies to families with three or more eligible children.) The child tax credit may also be claimed against the alternative minimum tax (see next page).

The child tax credit is phased out for individuals with income over certain thresholds. The credit is reduced by $50 for each $1,000 (or fraction thereof) of modified adjusted gross income (AGI) over $75,000 for single taxpayers or heads of households, over $110,000 for married persons filing jointly, and over $55,000 for married persons filing separately.

Under the old law, an individual could claim a child tax credit of up to $600 per child for 2003 and 2004, with the credit increasing in steps to $1,000 in 2010. The 2003 Act makes the $1,000 credit effective for 2003 and 2004. After 2004, the credit amount for each year will follow the old schedule, as shown in the table.

The 2003 Act provides a major benefit for those who claimed the child tax credit on 2002’s tax return. Under the new law, the increased amount of the 2003 child tax credit (that is, up to $400 per child) will be paid in advance, beginning in July 2003, on the basis of information contained on each taxpayer’s 2002 tax return (filed in 2003).

Example: Maria and Robert, who reported adjusted gross income of $50,000 on their 2002 joint tax return, have two children (ages 5 and 7) for whom they claimed a full child tax credit for 2002. In 2003, Maria and Robert will receive an advance payment of $800 — $400 for each child — as a result of the new law.

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