Tax reform has caused some changes to the rules for the Child Tax Credit in recent years. Here's how to know whether you qualify for this credit.
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Thanks to the tax law changes in the Tax Cuts and Jobs Act of 2017, the Child Tax Credit (CTC) is now worth up to $2,000 per qualifying child. A tax credit is a powerful tool, because it reduces the amount of tax you owe by one dollar for each dollar of a tax credit. This is different from a tax deduction, which only lowers your taxable income by one dollar for each dollar of deduction.
However, the Child Tax Credit can be limited if your adjusted gross income exceeds a specific amount based on your filing status. The Child Tax Credit isn't refundable, but you may be able to get a refund using the Additional Child Tax Credit (ACTC) if you end up owing less tax than the Child Tax Credit you qualify for. You can claim these credits when filing your tax return. Here are the details of how they work.
Qualifying for the Child Tax Credit
To qualify for the Child Tax Credit, you have to include the name and Social Security Number for each dependent you're claiming the tax credit for. You and any joint filers must also include your taxpayer identification numbers on your tax return.
Additionally, the child must:
- Be your daughter, son, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or their descendant.
- Be under age 17 at the end of the tax year.
- Not provide more than half of their own financial support during the tax year.
- Must have lived with you for more than half of the tax year (certain exceptions exist).
- Be claimed as a dependent on your tax return.
- Not file a joint tax return for the year (except when only filing to claim a refund of withheld income taxes or estimated taxes paid).
- Be a U.S. citizen, U.S. national, or U.S. resident alien.
- Have a Social Security Number issued by the Social Security Administration that is valid for employment.
If you file using TurboTax, you will be asked simple questions to determine if you meet the requirements to qualify for this tax credit when completing your tax return.
Determining the Child Tax Credit amount
Calculating the amount of the Child Tax Credit requires a few key numbers. Take the number of children that qualify for the tax credit and multiply this by $2,000 to calculate the total potential credit.
The potential Child Tax Credit amount will be reduced if your adjusted gross income exceeds $400,000 for people who are married and filing jointly, or $200,000 for all other tax filing statuses. For each $1,000 your adjusted gross income exceeds the limit (rounded up to the nearest $1,000), the total potential Child Tax Credit amount is reduced by $50 until it is completely exhausted.
Any remaining Child Tax Credit amount calculated above will be further reduced if your federal income tax is less than the potential Child Tax Credit amount. If your tax exceeds your potential Child Tax Credit amount, you can claim the full credit. If not, the credit is limited to the amount of your tax. Even so, you may qualify to have part of the excess credit refunded through the Additional Child Tax Credit using Form 8812.
Determining the refundable Additional Child Tax Credit amount
If you aren't able to take the entire Child Tax Credit because you don't have enough tax to offset, the Additional Child Tax Credit may help. This credit is refundable for the unused amount of your Child Tax Credit up to $1,400 per qualifying child, depending on your situation.
The credit is calculated by taking 15% of your earned income above $2,500. You get to claim the lesser of this calculated amount or your unused Child Tax Credit amount, up to $1,400 per qualifying child.
In rare cases, if you have three or more qualifying children, certain filers may be able to get a refundable credit even without meeting the traditional earned income requirements. The calculation for the credit using this method works by calculating the net Social Security and Medicare taxes you paid minus the earned income credit you claimed. If this number is greater than the standard calculation using the earned income method, you claim the credit using this calculation. If not, you use the number that results from taking 15% of your earned income above $2,500.
The Consolidated Appropriations Act (CAA) was signed into law on December 27, 2020 as a stimulus measure to provide relief to those affected by the pandemic. For tax year 2020, The CAA allows taxpayers to use their 2019 earned income if it was higher than their 2020 earned income in calculating the Additional Child Tax Credit (ACTC) as well as the Earned Income Tax Credit (EITC).
If you file using TurboTax, the program runs the numbers for you and picks the option that results in the largest tax credit.
Child Tax Credit changes from prior years
The Child Tax Credit has not had any changes for 2020 compared with 2019. However, the Child Tax Credit changed dramatically when the Tax Cuts and Jobs Act of 2017 was enacted. Starting in tax year 2018, the Child Tax Credit increased from $1,000 per qualifying child to $2,000 per qualifying child and the income limits for qualifying for the credit were raised significantly.
Claiming the Child Tax Credit on prior year returns
If you were eligible to claim the Child Tax Credit on prior year returns but did not do so, you can still claim it in certain cases. You claim this credit on prior year returns by filing an amended tax return. In most cases, you're allowed to file amended tax returns for three years following the date you filed your original return or two years from the date you paid the tax, whichever is later.