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.
• The Child Tax Credit (CTC) can reduce the amount of tax you owe by up to $2,000 per qualifying child.
• If you end up owing less tax than the amount of the CTC, you may be able to get a refund using the Additional Child Tax Credit (ACTC).
• ACTC is refundable for the unused amount of your Child Tax Credit up to $1,500 per qualifying child (tax year 2023).
• The amount of your Child Tax Credit will be reduced if your adjusted gross income exceeds $400,000 if married filing jointly or $200,000 for all other tax filing statuses.
2023 Child Tax Credit
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.
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 amount of 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 gone.
Any remaining Child Tax Credit amount 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 $1,500 per qualifying child for 2023, 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 the 2023 maximum of $1,500 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.
TurboTax Tip: If you were eligible to claim the CTC on prior year returns but didn’t do so, you may be able to claim it by filing an amended tax return within three years following the date you filed your original return or two years from the date you paid the tax, whichever is later.
2021 Child Tax Credit
Child Tax Credit Changes
- The American Rescue Plan raised the maximum Child Tax Credit in 2021 to $3,600 for qualifying children under the age of 6 and to $3,000 per child for qualifying children ages 6 through 17. Before 2021, the credit was worth up to $2,000 per eligible child, and 17 year-olds were not eligible for the credit.
- The Child Tax Credit changes for 2021 have lower income limits than the original Child Tax Credit. Families that do not qualify for the credit using the revised income limits are still eligible for the $2,000 per-child credit using the original Child Tax Credit income and phase-out amounts.
- In addition, the entire credit is fully refundable for 2021. This means that eligible families can get it, even if they owe no federal income tax.
New, Temporary Advance Child Tax Credit Payments
The Child Tax Credit has been expanded by the American Rescue Plan Act, that was enacted in March of 2021. Part of this expansion is to advance the 2021 tax credit to families by sending them direct payments during 2021 rather than having them wait until they prepare their 2021 taxes in 2022.
- Most families do not need to do anything to get their advance payment.
- Normally, the IRS will calculate the payment amount based on your 2020 tax return.
- Eligible families will receive advance payments, either by direct deposit or check.
The amount that you receive will be reconciled to the amount that you are eligible for when you prepare your 2021.
- Most families will receive about one-half of their tax credit through the advance payments.
- If you receive too little, you will be due an additional amount on your tax return.
- In the unlikely event that you receive too much, you might have to pay the excess back, depending on your income level.
For updates and more information, please visit our 2021 Child Tax Credit blog post.
2020 Child Tax Credit
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).
Other Dependent Tax Credit
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.