Taxpayers with children face a greater financial burden. For this reason, the government provides support to parents. It is important to distinguish between child benefit and the child tax credit. Many parents are unaware of the difference. As tax advisors, we regularly receive questions about the child tax credit and would therefore like to clarify the matter in this article. The differences and specific features of the two options are explained below. As taxpayers, parents do not have to do much to receive support from the government. The tax office handles most of the work. Nevertheless, you should be aware of the fundamental differences.
What is the difference between child benefit and the child tax credit?
Let’s address the most important question right at the start. The purpose of child benefit and the child tax credit is essentially the same: to provide financial relief to families with children. The difference lies in the approach. Child benefit is transferred monthly by the government to the account of the primary caregiver. The financial relief is thus provided through a direct monthly payment. With the child tax credit, the parents’ financial situation is improved indirectly. After the tax return is filed, the child tax credit reduces the income tax owed. So instead of paying out money, taxes—and thus money—are saved.
Which makes more sense—child benefit or the child tax credit?
Parents can choose either child benefit or the child tax credit. It is not possible to benefit from both at the same time. However, it is not you who decides which of the two options makes the most sense for your specific situation, but the tax office. The child tax credit is only worthwhile above a certain income threshold. Child benefit, on the other hand, is available to all parents regardless of their income.
Of course, the tax office doesn’t simply decide which option is financially better for you. After you’ve filed your tax return, the tax office calculates your tax liability using both child benefit and the child tax credit. A comparison makes it clear which option is more advantageous for you. The tax office will then determine and apply the “better” method. As a parent, you therefore need do nothing more than file your income tax return.
It should be noted that the child tax credit generally only becomes worthwhile if the joint gross income exceeds 60,000 euros. For single parents, the child tax credit is worthwhile starting at 30,000 euros.
How much child benefit do parents receive?
To give you an idea of the financial relief, the child benefit rates are listed below. In Germany, child benefit is increased almost every year. We are referring to the year 2020. Starting with the third child, a higher amount is paid, which increases with each additional child.
What is the rate for the child allowance?
The child allowance is a fixed rate, though it is also adjusted regularly. The child allowance is calculated based on the so-called childcare allowance and a child’s subsistence minimum. In 2020, the child allowance for each child is 7,812 euros. If the parents are jointly assessed, the child allowance is deducted jointly. For parents who are not jointly assessed, the amount is split. In the tax return, this is then reported as 0.5 points per child and parent.
It’s Always a Good Idea to Apply for Child Benefits
If you are expecting a child, it is always a good idea to apply for child benefit. The application is initially approved, and you will receive regular child benefit payments. If the child tax credit turns out to be more advantageous in your next tax return, the difference is simply offset against the child benefit. This means there is no disadvantage.
How long does the entitlement to child benefit and the child allowance last?
Entitlement to child benefit and the child tax credit is subject to certain conditions. Both options have the same requirements. The child must meet one of the following criteria to be eligible for child benefit or the child tax credit:
- The child is in their first vocational training or first degree program
- The child is in a second or advanced vocational training program
- The child is in a transition period from school to vocational training (max. 4 months)
- The child has demonstrably applied unsuccessfully for vocational training
These requirements do not need to be met until the child turns 18. However, they are mandatory for financial support to continue beyond that age. Child benefit and the child tax credit can be paid until the child turns 25 at the latest.
Special considerations regarding the child tax credit
Below, we explain some special features related to the child allowance. We have already explained the most important point: you do not need to enter the child allowance yourself. The entire process works automatically.
We have also mentioned that the child tax credit is split between parents who are not jointly assessed. However, it is not always desirable or appropriate for both partners to benefit from the child tax credit. Under the following conditions, the child tax credit can be transferred in full to one parent:
- The other parent lives abroad
- The other parent has adopted the child
- The other parent does not pay child support
- The father is unknown
- One parent has passed away
The adjustment can be requested from the tax office. Of course, proof of the aforementioned circumstances must be provided.
As the parent receiving the full child tax credit, it is possible to transfer half of the amount to another person. According to the Income Tax Act, eligible recipients include:
- The other parent
- The grandparents
- The stepparents
The transfer is completed in Schedule K of the tax return. The responsible tax office will then handle the implementation.
Help from a tax advisor
For parents and newlywed couples, the new tax situation can become very confusing. It therefore makes sense to consult a qualified tax advisor. Our team in Düsseldorf and Oberhausen can help you handle all tax matters efficiently and quickly. Contact us to schedule an appointment.
