From William Perez,
Your Guide to Tax Planning: U.S..
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You may take a child tax credit of up to $1,000 per child. The credit is calculated on the Child Tax Credit Worksheet on pages 41-42 of the Instructions for Form 1040 (PDF).

To qualify for the Child Tax Credit, you must:

• Have a qualifying child, and
• Your modified adjusted gross income must be below certain limits.

A qualifying child for the Child Tax Credit is:

• claimed as a dependent (Form 1040 line 6c – and make sure the box in checked in column 4), or you file Form 8901 for qualifying children who are not your dependents.
• age 16 or younger at the end of the year,
• a US citizen or resident alien, and
• is related to you by birth, marriage, adoption, or foster arrangement (for example son, daughter, grandchild, niece, or nephew).

Your Child Tax Credit is limited by two factors. First, your child tax credit is phased out if your income exceeds certain limits. The tax credit begins to be phased out if your "modified adjusted gross income" is over:

• $75,000 for Single, Head of Household, or Qualifying Widow,
• $110,000 for Married Filing Jointly, or
• $55,000 for Married Filing Separately.

If your income is above these limits, see Publication 972 Child Tax Credit (PDF) pages 4-7 to calculate your modified adjusted gross income and your eligible Child Tax Credit amount.

Second, your child tax credit is limited by your tax liability (Form 1040 line 44). For example, if your tax liability is $500, and your child tax credit is $1,000, then you can only take a $500 credit on line 52. Any excess tax credit may be refundable on line 68 as Additional Child Tax Credit. See the instructions for line 68 and Form 8812 Additional Child Tax Credit (PDF).

Who Needs to File IRS Form 8901?

You must file IRS Form 8901 (PDF) if you are attempting to claim a child for the child tax credit but that child is not your dependent. Normally, you must be able to claim the child as your dependent in order for you to qualify for the child tax credit.

If you cannot claim your child as a dependent for either of the following two reasons, you might be able to claim the child tax credit:

• You (or your spouse if filing jointly) can be claimed as a dependent by someone else, or
• Your qualifying child is married and files a joint tax return with his or her spouse, but the child would have no tax liability if a separate return had been filed.

If either of these two circumstances apply to you, then you'll need to fill out Form 8901 to claim the child tax credit on your non-dependent child.