Child Tax Credits

What are child tax credits

Child Tax Credits (CTCs) is a federal tax benefit that provides financial support for American taxpayers with dependent children under the age of 17.

CTC is for tax payers who earn more than $2,500, exclusive of Social Security benefits and unemployment compensation.

In simple terms, it’s a tax credit helps offset the costs of raising kids.

How much can you claim in Child Tax Credits

For tax year 2022, IRS allows a maximum tax credit of $2,000. This is phased out according to our adjusted gross income (AGI)) per qualifying dependent.

$1,500 of this credit may be refundable.

In order to claim the credit, you have to prove to the IRS that you and your child meet specific criteria.

When to expect your CTC refund

Early e-filers with error free returns and who opted for direct deposit as their refund method can expect refunds by February 28.

Credits for other dependents

Child and dependent care credit (CDCC)

The child and dependent care credit (CDCC) is also another tax credit for working parents or caretakers. It’s designed to help offset expenses such as day camp or afterschool care.

CTC and CDCC have different rules and qualifications.

If a taxpayer is not eligible to claim the CTC for a dependent, they might be eligible for the Credit for Other Dependent.

Other Dependents (ODC)

From 2018, An additional non-refundable credit of $500 is available for families with dependents.

Qualifying dependents for this credit includes;

• Children (with an ITIN and) not related to the taxpayer but living under their care and who would otherwise qualify for the CTC and
• non-child dependents such as parents and college students (age 19–24)

As much as the eligibility requirements for ODC are the same as CTC but you cannot claim ODC in place for CTC.

However, a taxpayer can qualify for both credit for other dependents and the CTC, however the COD is first utilized to lower the taxable income.

Additional Child Tax Credit (ACTC)

The Additional Child Tax Credit (ACTC) was eliminated as part of changes brought by the under the Tax Cuts and Jobs Act (TCJA) in 2018.

ACTC offered credits of up to $2,000 for every qualifying child and was only refundable if it reduced the tax bill to less than zero. (Remember was previously not refundable.)

How to calculate Child Tax Credits

For tax years 2022 and 2018 through 2020

• Multiply $2,000 per qualifying dependent child if your modified adjusted gross income is $400,000 or below (married filing jointly) or $200,000 or below (all other filers). Families must have at least $2,500 in income to be eligible (for the refundable portion).
• If your AGI exceeds above limits, reduce the credit amount by $50 for each $1,000 of income exceeding the threshold until it is eliminated.

For example

A married couple files a joint return and includes their 9 years old as a dependent. Their AGI is $426,000 for 2022. The IRS will not give the full $2,000 child credit.

Instead the $26,000 above the threshold will be phased out.

Instead, they will get a reduced credit of $1,300 ($50 x 26) – hence a final 2022 child credit of $700.

This child tax credit is received as follows;

• Nonrefundable portion of the credit

Use the refundable tax credit to Reduce your tax bill on a dollar-for-dollar basis to zero. either use it or lose it.

• Refundable credit also known as Additional Child tax credit(ACTC).

Apply to the IRS(using IRS Form 8812) for the refund of the “additional child tax credit.

This is a refund for anything above $1,500 that’s left over.

Formula for ACTC

The ACTC is determined by the earned income formula.

Under this formula, a family is eligible for a refund equal to 15% of their earnings (excess of $2,500), up to $1,400 per child (the maximum amount of the refundable portion of the credit).

There are no advance credits (taxpayers will get the credit when they file that return in 2023.).

Taxpayers will not receive monthly advance payments tax year 2022, but up to $1,500(that’s left over) per child of the credit is refundable if the taxpayers bill is smaller than the credit.

This TCJA is set to expire at the end of 2025 under P.L. 115-97(scheduled to revert to its pre-TCJA form).

2021 Expanded Child Tax Credit

The American Rescue Plan(ARP) in 2021 expanded CTC credits specifically for the year 2021 to mitigate the effects of Covid-19.

The 2021 stimulus law increased the eligibility and credit amount for eligible families.

The entire CTC credits was to be received as a refund for 2021, even if there was no federal income tax.

• Filers can claim u to $3,000 in credits for each qualifying child aged 6 to 17 and $3,600 for children aged 5 and younger. The credit is not capped, a filer with multiple children can claim on all his children.
• This credit will be phased out in two steps;

1. The credit begins to decrease at AGIs of $75,000 for single filers, $112,500 for head of households and $150,000 for joint filers, declining in value at a rate of 5% of a taxpayers AGI over limit until it reaches pre-2021 levels.
2. Credit’s value is further reduced by 5 per-cent an adjusted gross income (AGI) over $200,000 for single parents ($400,000 for married couples)

Half the credits are sent out as advance monthly payments (as direct deposit or check), while the remainder was taken as a credit on 2021 tax returns (you might need to pay back if excess amount was taken).

Most families do not need to do anything to access the advance payment, the IRS will calculate the payment amount based on 2020 tax return.

The credit is fully refundable – low-income families that do not qualify for CTC using the lower income limits are still eligible for the $2,000 per child credit using the original CTC income and phase out limits.

The Expanded child tax credits expired in 2021 has reverted to its pre-pandemic version.

Eligibility for Child tax credits

Who qualifies for the child tax credit

Generally, IRS uses seven “tests” to determine eligibility

1. Age: The child must be under the age of 17 at the end of the tax year. .
2. Relationship support: Qualifying child includes the taxpayer’s son, daughter, stepchild, foster child (placed with you by a government agency), brother, sister, half-brother, half-sister, stepbrother, stepsister or a descendant of any of those people (e.g., a grandchild, niece or nephew).
3. Dependent status: Taxpayer claims the child as a dependent. The child is not in a position to file a joint tax return, unless to claim a refund of withheld income taxes or estimated taxes paid.
4. Length of Residency: The taxpayer and the child have lived together for at least half the tax year. living together doesn’t have to be continuous. There are exceptions to this rule for non-custodial parents who are permitted by the custodial parent to claim the child as a dependent (a waiver form need’s to be signed by the custodial parent).
5. Financial support: Taxpayer is providing for at least half of the child’s support during the last tax year. The child is unable to provide for themselves for more than six months.
6. Citizenship: The child must be a “U.S. citizen, U.S. national or U.S. resident alien,” They must hold a valid ITIN. This is a departure from previous year when either an Social Security Number or an ITIN was required.
7. Family Income: Taxpayer needs to earn at least $2,500 and typically can’t exceed certain AGI requirements.

Apart from child passing the seven tests for a “qualifying child”, The taxpayer (or their spouse) needs to have either a Social Security number (SSN) or an Individual Taxpayer Identification Number (ITIN) to be allowed to claim CTC.

How to claim Child Tax Credits

Tax year 2022

File a 2022 form 1040 and fill out Schedule 8812 (“Credits for Qualifying Children and Other Dependents”)

Most quality tax software’s can guide a taxpayer through this process. This is done via with a series of interview questions and even auto-filling the forms.

IRS’ Free File is accessible if your income is below the stated threshold.

Tax year 2021

To claim the 2021 Expanded Child Tax Credit you must file a 2021 form 1040. You must fill out Schedule 8812 . The deadline for this is April 18, 2025.

If already filed a 2021 tax return without the CTC yet eligible for it, you can amend your tax return.

How to opt out of Child Tax Credits

Tax years 2022 and 2018 through 2020 is not affected. This is because there are no advance credits rather CTC is accessed when filing taxes the next year.

However, tax year 2021 has this provision. The entire CTC  is accessed as a refund for in the same year. This is 50% advance monthly payments, 50% credit on filing 2021 tax returns.

Taxpayers had an option of opting out of this arrangement using the IRS’s online portal. This should be done before the monthly deadlines(at least three days before the first Thursday of the month)

Why opt out of child tax credits

Sometimes advance payments don’t make sense. Taxpayer would rather take the full credit (if any) on the 2021 tax return.

• Some taxpayers prefer this credit as a lump sum on the 2022 tax return (file in early 2023).
• This is out of caution to avoid tax liabilities in year 2022. Especially if they access advance credits that they aren’t eligible for. This arises if there will be a substantial increase in income for tax year 2022 compared with 2021.

Bottom Line

The rules surrounding child tax credits can change from one year to the next, keep up on the current laws. Always remember that child tax credits are refundable, it might provide the needed cash in the end.

Finances and taxes tax Tips: 

• Don’t stress if the child or other dependents under your care do not qualify for Child Tax Credit. They can still qualify for the Other Dependent Tax Credit.
• No access to a financial planner or a tax advisor? Use free options tax software’s like the Volunteer Income Tax Assistance (VITA), org and MyFreeTaxes.com. They can help maximize on credit or deduction that you qualify for.