The Child Tax Credit Explained

The Child Tax Credit Explained

If you have children, one of the best and largest credits you can claim is the Child Tax Credit (CTC). A tax credit increases your tax refund or reduces the amount of tax you owe. Tax credits reduce your tax bill on a dollar-for-dollar basis. Even better: you might even be able to claim the CTC even if you don’t normally file a tax return. That means you can get a tax refund without earning the minimum threshold required by the IRS to file a return. Don’t miss this video where you’ll learn about the CTC, which has been around for decades and helps families get a tax break.

What do I need to know about the Child Tax Credit this year?

For tax year 2023, the CTC is worth up to a total of $2,000 per child. The CTC amount you can claim is based on your earned income and modified adjusted gross income. Also, the credit amount phases out when your earnings exceed certain thresholds: $400,000 for joint filing tax returns or $200,000 for all other returns. This means you can still get some money, but not the full $2,000, if you earn more.

What are the financial benefits of the Child Tax Credit?

The CTC helps provide financial relief to help offset the responsibilities of raising children. The credit can increase a tax refund amount, or lower the amount owed to the IRS. The tax refund you could receive, which might be higher because you can claim the CTC, could help cover child-related expenses, like childcare, clothing, and food. 

Who qualifies to claim the Child Tax Credit in 2023?

You can claim the CTC in 2023 if your child is under the age of 17 at the end of the year. This means that if you have a baby, or adopt or foster a child, on the last day of the year you can still claim the full credit as if you had the dependent throughout the entire year. Don’t forget, you’ll need a Social Security number for your child before filing your tax return.

A myth people often believe is that just because they’re not a child’s birth parent, that means they can’t claim the CTC. That’s just not true. For example, you could be their grandparent, aunt or uncle, or the child can be an adopted child.

There are seven “tests” for who can claim a child on their tax return and receive the CTC:

• Age
• Relationship
• Dependent status
• Residency
• Financial support
• Citizenship
• Income

Still unsure if you can claim the CTC? Meet with a Tax Pro to see if you meet all the qualifications. Then, you and your Tax Pro will fill out Form 1040 to claim the credit!

How does the Child Tax Credit work and how is it calculated? 

Millions of taxpayers qualify to claim this valuable credit, which reduces the amount of income tax owed to the IRS and can even boost a tax refund. Calculating is easy: every eligible child is “worth” the equivalent of $2,000. Even if you’re already due a refund, with the CTC you would get an even larger refund – For example: say you’re already getting a federal refund of $1,500, but you have two qualifying children, now you’ll get a tax refund of $5,500.

Pro tip: You can use IRS Publication 972 as a worksheet to help you calculate the CTC.

I qualify for the Child Tax Credit; how do I claim it?

Claiming the CTC is easy! If you meet all the qualifications, you enter your children’s information on Form 1040. When you meet with your Tax Pro, provide them with each child’s Social Security number and the correct spelling of their names. There is an extra form and additional questions, but the main part is having your child, with a Social Security number, some earnings, and meeting the tests.

What is the Additional Child Tax Credit?

The Additional Child Tax Credit (ACTC) is another confusing part of the CTC, but also very important. The ACTC is not some other credit or extra credit, but an amount families can claim if the CTC exceeds their income tax liability. Meaning, if the amount from the CTC exceeds the amount of tax you owe the IRS, or your taxes go to zero from other benefits, you might be able to claim the ACTC. Basically, you can receive a refund for the excess amount, even if you don’t owe income tax.

The maximum ACTC is $1,600 per child.

For instance, if you’re eligible for a $2,000 CTC and your taxes are only $1,000, you may add the remaining $1,000 credit to your refund.

What is the Child and Dependent Care Credit?

You may be eligible for the Child and Dependent Care Credit if you pay daycare while you or your spouse works. You calculate the credit based on your income and a percentage of expenses you incur for daycare. This credit is worth up to $$1,050 for one child, or up to $2,100 for more than one. To claim the credit, you will need to complete Form 2441.

If you have questions about the CTC, be sure to find an office near you and work with a Tax Pro today.