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The Child Tax Credit and the Self-employed

Much like the Earned Income Tax Credit (EITC), the Child Tax Credit (CTC) also applies to self-employment income. Enacted in 1997, the Child Tax Credit provides support to households with qualifying children and earned income. Qualification criteria include the age and residency of the child. The maximum credit amount is $1,000 for each qualifying child, calculated based on total earned income. Although the Child Tax Credit is primarily non-refundable, for some qualifying tax filers the Child Tax Credit is refundable (termed the “Additional Child Tax Credit”). When filing taxes for 2010 (due in April 2011), families can receive a refund equal to 15 percent of their earnings above $3,000, up to the credit’s full $1,000-per-child value. For example, a mother with two children who earned $14,000 in 2010 could receive 15 percent of $11,000, or $1,650, as a refund.

Based on data collected from 16 organizations during the 2009 tax season

According to the IRS, in tax year 2008, 25.2 million tax filers received the Child Tax Credit, reducing their income tax liability by  $30.5 billion. Further, 18.2 million qualifying filers received $20.4 billion from the refundable part of the Child Tax Credit. Based on data collected from SETI’s local partners, 30% of their self-employed tax filers claimed the Child Tax Credit.

Since self-employment income is “earned income” for the purposes of the Child Tax Credit, the tax prep-based formalizing process is significantly enhanced for low-income households by the Child Tax Credit. Tax preparation is also an opportunity to explain to self-employed filers the impact of good recordkeeping; the tax advantages of retirement savings; and the importance of opening a dedicated business checking account. Unfortunately, a “broken” self-employment tax interface means that many new low-income businesses face unexpected tax liabilities at tax time. While these self-employed households may have no income tax liabilities, they inevitably have sizeable Social Security liabilities (the “self-employment tax”). Therefore, the Child Tax Credit, enhanced by Schedule C net profits, becomes critical in more than paying off this liability.

For more information visit the IRS Web site or contact your local VITA center.


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