Child Credit Increases to $1,000 for 2003 and 2004

The bill increases the child tax credit from $600 to $1,000 per child for tax years 2003 and 2004. The 2003 increase will be paid in advance (similar to the "rebate" provided for under the 2001 Tax Act). Eligibility for the advance payment will be based on the 2002 return.

Currently, the phaseout of the child tax credit begins at:

• $55,000 for Married Filing Separately filing status;
• $75,000 for Single, Head of Household, and Qualifying Widow(er) filers; and
• $110,000 for Joint filers

Unlike most phaseout provisions, the end of the phaseout range is not fixed. The maximum credit is reduced by $50 for each $1,000 of income above the phaseout starting point. A credit amount of $600 per child means that the phaseout range increases by $12,000 for each child ($600/50 x $1,000). A credit amount of $1,000 per child means that the phaseout range increases by $20,000 for each child.

Example: Under previous law, the credit was completely phased out for a married couple with three children at $146,000 ($110,000 + $36,000). Under the new law, the credit is available until their income reaches $170,000 ($110,000 + $60,000).

Who Benefits?
The actual benefit of an increase to the child tax credit depends on the taxpayer's tax liability, earned income, and the number of qualifying children. For a typical family with two children, the maximum benefit is $800. Some or all of the child tax credit may be refundable. However, the rules for determining the refundable amount mean that individuals with earned incomes less than $22,500 will not benefit from this proposal.

Note: Congress is considering additional changes to the child tax credit right now.

Our Advice
The biggest question for all taxpayers: Who gets the check? The IRS is sending out letters beginning in July 2003 to inform taxpayers about the status of their advanced payment check. Most taxpayers who claimed the Child Tax Credit on last year's return will get a check from Uncle Sam this summer. The check is an advance payment of the new tax law's 2003 increase in the Child Tax Credit. Taxpayers who claimed the credit on their 2002 tax return, may be eligible for up to $400 for each qualifying child.

Why $400? That's the difference between the 2002 maximum credit of $600 and the increased 2003 amount of $1,000.

If you have had a significant change in the status of qualifying children since April 2003, such as a divorce, you may need professional tax help to make the most of your new tax situation. For further questions, Ask a Tax Advisor or find an office near you.

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