In the event your earned income is less than $2,500, you may not be eligible for the child tax credit. For one year, the Child Tax Credit—which reduces income taxes families owe dollar-for-dollar—was expanded in the American Rescue Plan from $2,000 per child to $3,600 for children below the age of 6 and to $3,000 for children under age 18. (Seventeen-year-olds, ineligible under the old law, were eligible for just one year.) The credit was reduced by $50 for every $1,000 above $112,500 for single heads of households and $150,000 for couples.
The refund is calculated as 15 percent of your income over $2,500, up to the per-child cap. The federal CTC is more broadly accessible than many of the individual state credits—several states provide the credit only to families with very low income or a disabled child or dependents under age 5, for example. But it’s possible for parents and caretakers to claim both the state and federal credits and wind up with a sizable tax benefit overall.
List each qualifying child and their Social Security numbers
Depending on your income and family size, the CTC is worth up to $2,000 per qualifying child. CTC amounts start to phase-out when you make $200,000 (head of household) or $400,000 (married couples). Each $1,000 of income above the phase-out level reduces your CTC amount by $50. Under the 2021 law, the credit was fully refundable, meaning families who owed little or no federal tax got a check for the full amount.
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The CTC is among the largest tax expenditures — in 2023 it was the fourth most expensive tax expenditure and cost $122 billion, with $74 billion in tax reductions and $48 child tax credit definition billion in refundable tax credits. The enhancements made to the CTC under the TCJA are set to expire at the end of 2025, at which point expenditures for the credit would decline by nearly 50 percent. In this article, we’ll discuss what the child tax credit is, who can claim it, and an alternative for taxpayers with dependents who don’t quite meet the IRS definition of a “child.” Raising children can be expensive, as every parent reading this already knows. Thankfully, some pretty valuable tax breaks are designed to help ease the financial burden on parents in the U.S., and none is more widely available than the child tax credit. In 2021, the American Rescue Plan Act of 2021 increased the amount of the child tax credit to $3,000 per qualifying dependent.
About 40% of that $117.5 billion will go to households with incomes above $100,000. A relatively small share goes to low-income households—15% will go households with incomes under $30,000. To qualify for the child tax credit in 2021, your child must have been under the age of 18 at the end of 2021 and have a Social Security number. By reducing financial stress on families, it can contribute to better health and education outcomes for children, laying a stronger foundation for their future productivity and success. In essence, while the CTC is a direct financial support, its implications for societal welfare and economic growth are significant.
The Child Tax Credit, which has been expanded significantly by Congress since it was first written into law nearly 25 years ago, is a significant element of the federal government’s effort to aid families with children. Congress expanded it substantially when it passed President Biden’s American Rescue Plan in March 2021. Former President Joe Biden introduced the American Rescue Plan in 2021, which increased the child tax credit from $2,000 to $3,000 per child over the age of 6. That amount could be refunded to you if you qualify, provided you haven’t already used that amount of the child tax credit to offset your tax bill. The IRS child tax credit website outlines what makes a dependent child eligible.
If you owe $8,000 in tax for 2020 after considering your deductions, and you have two qualifying children, it could reduce your tax liability to $4,000. You can receive up to $1,500 per eligible child as a refund if your child tax credits exceed your tax liability by claiming the additional child tax credit (ACTC). If you’re doing your taxes yourself, make sure you take all the eligible child tax credits and tax exemptions. You can also use online tax preparation services to ensure you obtain all the tax credits and deductions you can. This step can help reduce your overall tax liability and even help you earn cash back. If your tax liability is lower than your child tax credit, you’re only eligible for a partial credit of $1,500 per qualifying dependent.
Additionally, qualifying relatives (like dependent parents) and even dependents who aren’t related to you, but live with you, can be claimed for this credit. To be eligible for the child tax credit, you must have a qualifying dependent you claim on your current year taxes and provide more than one-half of their care. Families didn’t have to wait until they filed their tax returns to benefit from the credit. In July 2021, the Internal Revenue Service began making partial payments monthly—up to $300 per month for each child under age 6 and up to $250 a month for each child between the ages of 6 and 17. The November 2021 payments totaled about $15 billion and went to 36 million families. In 2021, the federal government offered a $3,600 expanded child tax credit, but many parents may have been unaware of the credit and missed out on the payment if they didn’t file.
The tax credit is refundable if you don’t owe any taxes, which means you can claim the child tax credit as a refund. But unlike other credits, the Internal Revenue Service (IRS) limits the refundable amount partially up to $1,400 for each child (known as the Additional Child Tax Credit). The Washington Post reported that senior Democratic lawmakers are drafting legislation to allow the IRS to make direct payments to families who qualify for the child tax credit. Families would receive a monthly payment of $300 for each child under the age of 6, and $250 for each child age 6 to seventeen.
- Generally, a portion of the CTC can be refundable as the Additional Child Tax Credit (ACTC), allowing families to receive a refund if their credit exceeds their total tax liability.
- To claim your 2021 Child Tax Credit, you must file a 2021 tax return by April 18, 2025.
- Initially a small $500 per child nonrefundable credit, it was progressively made larger and extended to more taxpayers through subsequent legislation.
- This step can help reduce your overall tax liability and even help you earn cash back.
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A version of the credit was proposed by Republicans in their 1994 Contract with America and by President Clinton in 1995, and was eventually enacted in 1997 as a $500-per-child, non-refundable credit aimed at middle and upper middle income families. Other dependents—including children aged 17 and 18, and full-time college students aged 19 to 24—were eligible for a non-refundable credit of up to $500. You are required to file Form 8862 if the IRS denied or reduced the child tax credit after 2015 for any reason besides a mathematical or clerical error (collectively referred to as a math error). For more information on how to complete the worksheet, review IRS Publication 972.
Who Qualifies as a Dependent for the Child Tax Credit in 2025?
- If this family meets the income requirements set forth by the tax code, they can apply for the Child Tax Credit when filing their taxes.
- So, if you are single with an AGI of $220,000, your child tax credit is reduced by $1,000 (5% of $20,000).
- To file now, you’ll need Form 1040-X (the amended return) and include Schedule 8812.
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- Tax credits like CTC are factored in later, after your tax bill has been calculated—much like a store credit at your favorite retailer.
This means the family could potentially reduce their tax bill by $4,000. In cases where the credit amount surpasses the family’s tax liability, they might receive a refund, further aiding in their financial stability. For the 2024 and 2025 tax years, families can receive a tax credit of up to $2,000 per eligible child through the child tax credit, with a portion of that amount — up to $1,700 — available as a refundable credit.
A noncustodial parent must attach to his or her return a Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, or a substantially similar statement, signed by the custodial parent to claim the child as a dependent. Though we can’t review every available financial company or offer, we strive to make comprehensive, rigorous comparisons in order to highlight the best of them. The compensation we receive may impact how products and links appear on our site. In addition to meeting the basic eligibility requirements for the CTC, your earned income should be at least $2,500. Increase your desired income on your desired schedule by using Taxfyle’s platform to pick up tax filing, consultation, and bookkeeping jobs.
Everyone’s tax situation is different, so remember to consult with a financial professional when considering whether to claim the Child Tax Credit. Eligibility for the CTC is based on the parent or caregiver’s income and relationship to the child, the child’s age and living situation, and other factors. When you use Taxfyle, you’re guaranteed an affordable, licensed Professional.
What to do with a Child Tax Credit refund
The child tax credit is one of the most popular credits to claim during tax season, so here’s everything to know about how it works. A study by researchers at Columbia University found that 23 million children did not generate the full tax credit under the CTC structure prior to the ARP. Of those children, 50 percent are Black non-Hispanic and Hispanic, and 70 percent are the children of single parents who are female. Sixteen states offer their own Child Tax Credit to residents.2 In 12 of those states the unused portion of the credit is fully refundable when you file a state tax return. You don’t need to owe federal income tax to take advantage of the Child Tax Credit.
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However, this extra boost has now expired, and child tax credit rates for 2022 revert back to the previous level of $2,000 per dependent. The Child Tax Credit exemplifies a government strategy aimed at supporting families with dependents, reinforcing the importance of societal and economic investments in the future generation. In most cases, the Child Tax Credit does not affect eligibility for other government assistance programs.
At Taxfyle, we connect you with licensed, experienced CPAs or EAs in the US. We handle the hard part of finding the right tax professional by matching you with a Pro who has the right experience to meet your unique needs and will file your file taxes for you. Implement our API within your platform to provide your clients with accounting services. To receive the credit as a refund there are income requirements, see Overview.