Understanding the Additional Child Tax Credit begins with the original Child Tax Credit. So what do you need to know? To start, the Child Tax Credit is up to a $1,000 credit that you can claim for each of your dependent children under the age of 17, subject to some limitations.
The article below is accurate for your 2017 taxes, the one that you file this year by the April 2018 deadline, including a few retroactive changes due to the passing of tax reform. Some tax information below will change next year for your 2018 taxes, but won’t impact you this year. Learn more about tax reform here.
The Child Tax Credit and Its Limitations
It’s important to know that the Child Tax Credit (CTC) is a tax reduction, not necessarily a refund. You might have three children and therefore think you’re entitled to a $3,000 credit, but you won’t gain the benefit unless your tax bill for the year is in excess of $3,000.
For example, if you owed $3,001 in taxes, the credit would be applied and you’d only owe the IRS $1. If you didn’t owe the IRS anything, the Child Tax Credit would have no effect at all because there's no tax to be reduced.
The Additional Child Tax Credit
The Additional Child Tax Credit (ACTC), however, can make at least a portion of your unused regular Child Tax Credit refundable if you’re eligible. Qualifications for the ACTC are the same as the requirements for the Child Tax Credit, except you also need to have at least $3,000 in earned income. TurboTax will automatically give you this credit if you're eligible.
The Additional Child Tax Credit is up to 15% of your taxable earned income over $3,000. For example, if you have three children:
- If your earned income was $30,000, the additional credit would apply to $27,000 (the amount over the $3,000 threshold).
- 15% x $27,000 = $4,050
- You would not receive the entire $4,050 because the CTC limit is $3,000, but you could still receive the full $3,000 refund—in other words, $1,000 for each of your children.
On the other hand, if your earned income was $13,000, 15% of your taxable income over $3,000 would be $1,500 ($10,000 x .15). You could receive a refund of $1,500 as opposed to the full $3,000 credit because the refundable portion of your credit cannot exceed 15% of your taxable earned income that is above the $3,000 threshold.
The Consolidated Appropriations Act
The $3,000 threshold for calculating the Additional Child Tax Credit was originally slated to jump to $10,000 after 2017. In that case, you would only be eligible for 15% of your taxable earned income over $10,000, which could shrink your refund considerably.
But, under the terms of the Consolidated Appropriations Act, this threshold is now permanently set at $3,000 for all tax years beginning after December 31, 2015.
The Protecting Americans from Tax Hikes Act (PATH Act)
Another thing to consider is the Protecting Americans from Tax Hikes (PATH) Act, which may cause a bit of a delay in receiving your ACTC refund depending on when you file your tax return.
The PATH Act dictates that the IRS cannot begin sending out refund checks to any taxpayer claiming either the ACTC or the Earned Income Tax Credit (EITC) until the 15th day of the second month after the end of the tax year. The rule went into effect on January 1, 2017, so if you file your tax return the first week of January, the IRS must hold your refund until February 15.
The rule applies to your entire refund, so you won’t get separate refund checks for the money that is and is not associated with the ACTC—the total amount of all refunds due to you will be delayed. This delay gives the IRS additional time to investigate issues of identity theft and fraud.
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