Additional Child Tax Credit - ACTC

[atif1040]

Hi All

Does anyone know what is the link between ACTC and dividend income? When I report dividend in the system the ACTC gets reduce despite the AGI is below $200k. 

[TaxGuyBill]

When the ADDITIONAL Child Tax Credit goes down, does the Child Tax Credit go up?

If the extra income creates more income tax, the Child Tax Credit will offset it.  The higher Child Tax Credit will decrease the Additional Child Tax Credit.

[atif1040]

Thank you for your reply. I understand the concept. But I need to explain to the client that more the dividend income lesser the ACTC. I need to establish a link between the two so I can explain to the client why he is not going to get full ACTC even his AGI is below the phase-out threshold. 

[George4Tacks]

More QUALIFIED dividend means less tax. Less tax means less credit.
Work Long Term Capital Gain into your explanation.
Make a spreadsheet with a few scenarios to show the client.

[TaxGuyBill]

Show them the TOTAL credit.  It will be the same (or in some cases, more).  Just because the tax forms separate it as two items (refundable and non-refundable), it really is only one credit.   So just show them what the total amount is.

[itonewbie]

The only caveat is that the total may not necessarily be the same mathematically because of the 15% limitation in some cases. 

[atif1040]

Thank you for your reply.

It is not a qualified dividend. He is based in UK and has a limited company where he withdraws some salary and some dividend. 

And apparently every time I enter dividend in system the ACTC goes down and when I remove it he gets the full amount. 

[atif1040]

He is trying to do some planning for next year and needs to know how much he can take as dividend and salary without losing the ACTC. 

[TaxGuyBill]

You never answered the very first thing that I asked.  Does the non-refundable Child Tax Credit go up?

If so, the total amount of the Credit is the same.  The numbers may change which lines they are on the tax form, but the total amount is the same.  You need to stop thinking about only the Additional part and look at the TOTAL Child Tax Credit.

[atif1040]

There is not any child tax credit because of preparing 1116. So tax liability is $0. Consequently, no movement in child tax credit. 

[itonewbie]

@atif1040 What you stated is not exactly correct.  FTC from your client's employment income (even assuming all of that is foreign sourced), to the extent there are other taxable income, such as dividends in your case, will be limited and CTC would be used to offset the residual liability.

When there's an increase in, let's say, dividend income, that will affect:

• Line 12a: Overall, there should be an increase in tax due to the additional income;
• F.1116: Limitation will be adjusted based on the new ratio;
• CTC: Presumably increased due to higher residual tax from income not eligible for FTC; and
• ACTC: Presumably reduced due to corresponding increase in CTC, all else being equal.