What You Need to Know About the Child Tax Credit
Tax credits can take a big bite out of your income tax burden. Claiming the child tax credit can lower your taxable income and may even qualify you for a refund.
For the 2024 tax year, eligible taxpayers can claim up to $2000 per dependent child. If you are filing for previous years, you should be aware that, for 2021 only, the credit was increased to $3600 per child but reverted back to $2000 in 2022.
Do I Qualify for the Child Tax Credit?
High earners may not qualify for child tax credit (see the seven rules below).
If you have a dependent who is not a child and meets certain conditions, you may be eligible to claim $500 for each one.
Ultimately, seven qualifying factors determine eligibility:
· Age. The child must be 16 or under at the end of the tax year you are filing for.
· Relationship. The dependent must be your own child, a stepchild, an adopted child, or a foster child officially in your care per the courts or authorized agency. Adopted children are always treated as your own. However, even if the adoption has not been finalized by the end of the tax year, you can still claim the credit. You may also claim for siblings or step-siblings, grandchildren, nieces, nephews, etc., so long as they meet other criteria.
· Family income. Any taxpayer earning more than $200,000 is exempt, or $400,000 if married and filing jointly. Parents with incomes above these thresholds may be able to claim a partial credit.
· Support. You must support the dependent to the extent that the child is not contributing more than 50% to their own support.
· Dependent status. To claim a dependent on your return, the child must:
o Be your child, niece, nephew, grandchild, sibling, or foster child.
o Have resided with you for more than half of the tax year.
o Not have contributed more than 50% to their own support for the tax year.
o Be younger than 19 or below age 24, attend school full-time at least five months of the year, or be permanently disabled at any age.
· Citizenship. The claimed individual must be a US citizen, resident alien, or US national (born in American Samoa or the North Mariana Islands).
· Length of residency. The dependent must have lived with you for at least half of the tax year, with the following exceptions:
o If the child passes away during the tax year, they are considered to have lived with you the entire year.
o Some exceptions are allowed for children of divorced or separated parents.
o Temporary absences are, in some instances, still counted as time lived with you. Such special circumstances include time spent in detention at a juvenile facility, hospitalization, military services, vacation, boarding school, and vacation.
How Can the Child Tax Credit Result in a Refund?
The standard child tax credit is not refundable in tax years 2024 and 2025. If your tax bill exceeds the tax credit, it will be lowered to zero, but there will be no refund.
However, if you are claiming an Additional Child Tax Credit (ACTC), you may be eligible to receive up to $1700 per child as a refund. Use Form 1040’s Child Tax Credit Worksheet to find out if you qualify. If you do, use Schedule 8812 to claim the ACTC.
What this means is that if the $2500 tax credit exceeds your liability, you can claim the remainder as an ACTC and receive up to $1700 as a refund.
The ACTC is meant to help lower-income families. However, taxpayers who exceed the income thresholds may be able to claim a partial refund. For each $1000, their income exceeds the limits, the credit is reduced by $50.
Lastly, to claim the ACTC, the dependent child must have a social security number. If they do not, you can’t claim this benefit.
Claiming The ACTC May Delay Your Refund
As of 2015, the IRS has been granted additional time to review returns that include the Additional Child Tax Credit and some other refundable credits. Unfortunately, this type of filing is frequently subject to fraud, so per the terms of the PATH Act, the IRS cannot issue returns before February 15th for any taxpayer claiming this credit. While this isn’t a significant delay, if you file in January, your return won’t be issued before February 15th.
Claiming Tax Credits for Prior Years
As mentioned above, the allowable amount for the Child Tax Credit increased to $3600 for the 2021 tax year only.
In tax years before 2018, the Child Tax Credit only provided $1000 per dependent, and though the credit would reduce your tax burden dollar for dollar, no portion of it was refundable, and any excess would not result in a refund.
The ACTC was also a bit different as it applied only to families earning more than $3000 per year, resulting in a refundable tax credit equivalent to 15% of their taxable income to a maximum of $1000 per child.
The Tax Cuts and Jobs Act of 2017 simplified these rules and broadened eligibility by combining them into a single $2000 tax credit and lowering the earnings limits.
Additional Tax Credits for Parents and Families
If you qualify for and are claiming the Child Tax Credit, there are other tax credits you may be eligible for.
The Child and Dependent Care Tax Credit enables you to claim child care expenses so you or your spouse can work or actively seek work.
The Earned Income Tax Credit (EITC) is for low-to-moderate-income families under certain rules, even if you can’t claim a child or dependent on your tax return.
The Child Adoption Credit allows you to claim up to $16,810 in qualified expenses related to an official adoption or foster care placement.
Education Credits can be claimed for dependent children attending a recognized higher education institution if you, your spouse, the dependent, or a third party pays the qualified expenses.
Other dependents who are not your children may also allow you to qualify for the Credit for Other Dependents (ODC) tax credit.
Unsure Where to Start? We’re Here to Help!
Book a call today to speak to a qualified tax preparer about the Child Tax Credit.