Allowance of the Child Tax Credit Does Not Follow the Ordering on Form 1040

From TaxAlmanac

Allowance of the Child Tax Credit Does Not Follow the Ordering on Form 1040

Per Publication 972, when the Child Tax Credit is claimed in conjunction with the Adoption Credit, Mortgage Interest Credit and/or DC First Time Homebuyer's Credit, the credits are not allowed in the same order as they appear on Form 1040. Following the Worksheets in Pub. 972, tax is first reduced by the adoption credit, mortgage interest credit and DC first-time homebuyer credit, all of which are figured using a tentative child tax credit which is computed on Worksheet 1 in Pub. 972. Then, the remaining tax is reduced by the child tax credit. Assuming the taxpayer qualifies, the child tax credit not claimed on Form 1040, line 51 is then allowed as an Additional Child Tax Credit (Form 8812). These ordering rules, as opposed to the order on Form 1040, generally result in a lower tax liability because of the allowance of the Additional Child Tax Credit.

IRS Notices

Many taxpayers have received IRS Notices disputing the credit order as prescribed by Publication 972. In the notices, the IRS is allowing the credits against tax in the order they appear on Form 1040 – Child Tax Credit followed by the Adoption, Mortgage Interest and DC First-Time Homebuyer Credits and ignoring the worksheets in Publication 972. Generally, the IRS Notices report additional tax due because the allowance of the child tax credit before the other credits reduces the Additional Child Tax Credit.

Example – Credit Ordering Rules Under Publication 972

Steve and Ann Miller have 2 children who are qualifying children for the child tax credit. Steve and Ann’s AGI and Taxable Earned Income are $65,000 and their total tax is $5,199. In addition to the child tax credit, they are also claiming an adoption credit of $10,390.

Step 1. Based on Form 1040 instructions, page 37, the Miller’s determine they must use the Child Tax Credit Worksheet in Pub. 972, page 4 to figure their child tax credit because they are also claiming the adoption credit.

Step 2. Steve and Ann complete the Child Tax Credit Worksheet as follows:

1. Enter $2,000 (2 X $1,000).

2. Enter AGI of $65,000.

3. Enter –0- since they did not exclude income from Puerto Rico or any income on Forms 2555 or 4563.

4. Add lines 2 and 3. Enter $65,000.

5. Enter $110,000 for MFJ.

6. Check the “No” box since the amount on line 4 ($65,000) is less than line 5 ($110,000) and enter –0- on line 7.

7. Enter –0-.

8. Check the “Yes” box since the amount on line 1 ($2,000) if more than the amount on ln.7 ($0). Subtract line 7 from line 1 and enter the result ($2,000).

9. Enter the amount of total tax from Form 1040, line 45 ($5,199).

10. Enter –0- since Steve and Ann do not have any of the credits on Form 1040, lines 46 through 50.

11. Check the “Yes” box since they are claiming the Adoption Credit, Form 8839. They must then complete the Line 11 Worksheet in Pub. 972 to figure the amount to enter here.

Step 3. Steve and Ann complete the Line 11 – Child Tax Credit Worksheet as follows:

1. Enter the amount from line 8 of the Child Tax Credit Worksheet ($2,000). 2. Enter taxable earned income ($65,000).

3. Check the “Yes” box since the amount on line 2 ($65,000) is more than $10,750. Subtract $10,750 from the amount on line 2 ($65,000) and enter $54,250.

4. Multiply line 3 ($54,250) by 15% (.15) and enter $8,138.

5. Check the “No” box since line 1 ($2,000) is not more than ($3,000). Then leave lines 6 through 9 blank, enter –0- on line 10 and go to line 11.

6. Blank

7. Blank

8. Blank

9. Blank

10. Enter –0-.

11. Enter the larger of line 4 or line 10 ($8,138).

12. Check the “Yes” box since the amount on line 11 ($8,138) if more than the amount on line 1 ($2,000) and enter –0-. Next, figure the amount of the Adoption Credit using the amount from line 12 when ask to enter the Child Tax Credit from Form 1040, line 51. This is the Tentative Child Tax Credit ($0).

13. Enter the amount of allowable Adoption Credit from Form 8839, line 18 ($5,199). The Adoption Credit ($10,390) is allowed to the extent of the total tax ($5,199). This results in an Adoption Credit Carryover of $5,191 ($10,390 - $5,199).

14. Enter the amount from line 10 of the Child Tax Credit Worksheet ($0).

15. Add lines 13 and 14 ($5,199) and enter the result on line 11 of the Child Tax Credit Worksheet.

Step 4. Steve and Ann now complete the rest of the Child Tax Credit Worksheet as follows:

11. Enter the result from line 15 of the Line 11 - Child Tax Credit Worksheet ($5,199).

12. Subtract line 11 from line 9 ($0).

13. Check the “Yes” box and enter the amount from line 12 ($0) since line 8 is more than line 12. Enter –0- on Form 1040, line 51. This is Steve and Ann’s Child Tax Credit.

Step 5. Steve and Ann complete Form 8812 as follows:

1. Enter the amount from line 8 of the Child Tax Worksheet ($2,000).

2. Enter the Child Tax Credit ($0) from Form 1040, line 51.

3. Subtract line 2 from line 1 ($2,000).

4. Enter Total Earned Income ($65,000).

5. Check the “Yes” box since the amount on line 4 ($65,000) is more than $10,750. Subtract $10,750 from the amount on line 4 ($65,000) and enter $54,250.

6. Multiply line 4 ($54,250) by 15% (.15) and enter $8,138.

7. Check the “No” box since they do not have 3 or more qualifying children. Skip Part II, lines 7-12 and enter the smaller of line 3 or line 6 on line 13 ($2,000).

8. Blank

9. Blank

10. Blank

11. Blank

12. Blank

13. Blank

14. Enter $2,000 here and on Form 1040, line 67. This is Steve and Ann’s Additional Child Tax Credit.