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 Child Tax Credit and Its Limitations
For tax years prior to 2018, the Child Tax Credit provides up to a $1,000 per child tax credit for a maximum of three children. The Additional Child Tax Credit allows for a portion of the regular Child Tax Credit that you were not able to claim, to be refundable even if you do not owe any tax.
For tax years after 2017, the Child Tax Credit increases to $2,000 per child with up to $1,400 of it being refundable. There is no longer an Additional Child Tax Credit separate from the Child Tax Credit.
For Tax Years Prior to 2018:
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 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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