The Child Tax Credit Might Pay For Diapers
According to recent research, the cost to raise a child to 18 in the US is $331,933. The Federal Child Tax Credit of $2,000 per child won’t make much of a dent in your total cost to be a parent but it may help pay for those diapers or a summer camp. Here are the details on the Child Tax Credit (CTC) and some ideas on making sure you qualify:
What is the child tax credit?
The child tax credit is a nonrefundable tax credit available to taxpayers with dependent children under the age of 17. The credit can reduce your tax bill on a dollar-for-dollar basis. The CTC is partially refundable for taxpayers in lower income brackets, but that won’t be you if you are running a successful dental practice.
To qualify for the CTC, you and your children must meet certain eligibility criteria and your income must fall below the “high earner” income limits (see below).
How much is the child tax credit worth?
For the 2024 tax year (tax returns filed in 2025), the child tax credit will be worth $2,000 per qualifying child, with $1,700 being potentially refundable for low income taxpayers.
Who qualifies for the child tax credit?
There are seven tests you and your qualifying child need to pass:
Age: Your child must have been under the age of 17 at the end of the tax year. They are still a child until 18 but just not eligible for the credit.
Relationship: The child you’re claiming must be your son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister or a descendant of any of those people (e.g., a grandchild, niece or nephew). A family tree may be useful in determining relationship.
Dependent status: You must be able to properly claim the child as a dependent. There is another battery of tests for dependency, but the first is providing financial support.
Residency: The child you’re claiming must have lived with you for at least half the year. There are some exceptions to this rule including hospitalization, attending school or being kidnapped.
Financial support: You must have provided at least half of the child’s support during the last year. It is unlikely that your 16 year old financially supported themselves for more than six months, but this may come into play when considering the Credit for Other Dependents for your child in college.
Citizenship: Your child must be a "U.S. citizen, U.S. national or U.S. resident alien," and must hold a valid Social Security number.
Income: Your income (modified adjusted gross income) cannot exceed certain income requirements. For 2024, the credit begins to phase out at $200,000 or less, if filing single, or $400,000 or less, if you're filing jointly. The credit will completely phase out at $240,000 for individuals and $480,000 for married couples filing jointly.
How can you ensure you are getting the credit?
For ultimate tax savings, including optimizing the QBID deduction and staying in the 24% tax bracket, it is a good idea to keep your income below the CTC limits ($200,000 if filing single or $400,000 if you're filing jointly). The Child Tax Credit just becomes that cherry on top of larger tax savings under those income levels. If you are close to the limits, here are some great ideas to manage your taxable income:
Ensure you are maximizing contributions to your 401(K). Remember that only traditional contributions and not ROTH contributions reduce your income, so a blended model might be right to save taxes now and in the future.
Consider Profit Share and Cash Balance contributions. These additions to your 401(k) plan can super-charge your retirement funds and dramatically reduce your taxable income.
Optimize Deduction for your Practice. Whether it is using Sec. 179 to write off new equipment or taking an annual practice board meeting, there are a lot of great (& legal) ways to reduce your taxable income from the practice.
If you have reached that point in your practice where you are soaring way over the CTC limits, you likely don’t have any children at home; and if you do, you are much better off keeping those seven-figure profits than getting a $2,000 credit.
Every practice and child is different.
If you have specific questions on the Child Tax Credit, please schedule a consultation with JNG Advisors today to find out about how we can help you grow your practice and save taxes (parenting advice optional).