The Child Tax Credit (CTC) is a crucial pillar of the US tax system, offering significant financial relief to families with children. It serves as a direct means of reducing tax burden or providing refunds, making it an invaluable resource for countless households.
Understanding the basics of the Child Tax Credit – including eligibility requirements and claiming procedures – is essential for families aiming to optimize their financial well-being. This article will concisely overview the Child Tax Credit, highlighting its importance and practical implications for families nationwide. Also, check out Beem, which offers accurate and reliable online tax filing services without breaking the bank.
What is Child Tax Credit?
The Child Tax Credit is a tax advantage available to American taxpayers with children under 17 by the end of the tax year. For the 2023 tax year, which corresponds to the tax return filed in 2024, the credit amounts to $2,000 for each qualifying child. Eligibility for the full credit extends to individual filers earning up to $200,000 or joint filers with a combined income of $400,000.
However, the benefit gradually decreases for parents with higher incomes. Notably, the Child Tax Credit returned to its pre-2021 levels after two years of temporary increases due to emergency legislation enacted in response to the COVID-19 pandemic. During this period, the credit reached as high as $3,000 per child and $3,600 for children under six.
How Does the Child Tax Credit Works?
The Child Tax Credit offers a straightforward way to lower your total tax bill by directly reducing the amount owed on a dollar-for-dollar basis. This credit provides more substantial savings than tax deductions that only reduce taxable income. You’ll need a Social Security number for the dependent child and must file Schedule 8812 (Credits for Qualifying Children and Other Dependents) and Form 1040 to claim it.
Eligibility hinges on several factors — the child must be under 17 at the end of the tax year, should have lived with you for more than half the year, should not have provided more than half of their financial support, and must meet citizenship or residency requirements.
Additionally, the child must depend on your tax return and should not have filed a joint return with a spouse except for claiming a refund of the estimated tax paid. These criteria ensure that the credit benefits those who have taken care of qualifying dependents throughout the tax year.
How Much is the 2023 Child Tax Credit?
Here are all the details on the 2023 child tax credit:
Child Tax Credit 2023 (Taxes Filed in 2024)
In 2023, the child tax credit is valued at $2,000 per eligible dependent child if your modified adjusted gross income (MAGI) falls at $400,000 or below for a married couple filing jointly and $200,000 or below for all other filers. There’s also a refundable portion called the additional child tax credit, which can be up to $1,600. However, if your MAGI surpasses these thresholds, the credit diminishes by $50 for every $1,000 over the limit.
Child Tax Credit Expansion: What Could the New Tax Deal Mean for You?
The proposed child tax credit expansion promises temporary relief for lower-income families and those who typically miss out on its full benefits. Under the plan, the maximum refundable amount per child would gradually increase, starting at $1,800 for 2023 taxes filed this year and then to $2,000 by 2025.
Moreover, changes in the calculation method would ensure a fairer distribution of the credit, allowing parents to account for the number of children they have. To qualify for the refundable portion, filers must earn at least $2,500, with options to use current or prior year’s income in 2024 and 2025.
The update will likely be reflected in significant tax software programs. Moreover, the base child tax credit of $2,000 per qualifying child would be adjusted for inflation in 2024 and 2025, potentially increasing by approximately $100 annually.
Child Tax Credit 2024
In the 2024 tax year, which pertains to tax returns filed in 2025, the child tax credit will amount to $2,000 per eligible child. In addition, up to $1,700 would be refundable through the additional child tax credit.
How has the Child Tax Credit Changed Over the Years?
The Child Tax Credit has undergone significant changes, particularly with the introduction of the American Rescue Plan in 2021. Before 2021, the credit was capped at $2,000 per eligible child, with no eligibility for children aged 17 and above. However, the American Rescue Plan increased the maximum credit to $3,600 for children under six and $3,000 for children between 6 and 17.
Notably, the entire credit became fully refundable in 2021, allowing eligible families to receive a refund even if they owed no federal income tax. The age and income requirements were also adjusted, expanding eligibility for more families.
For instance, now, children need to be under 18 at the end of the year to qualify, and income limitations have been adjusted to provide increased credit to families earning less than $75,000 for single filers, $112,500 for heads of household, and $150,000 for joint filers. Beyond these thresholds, the credit phases out gradually. These changes aim to provide more significant financial support to families, particularly those with lower incomes, through the Child Tax Credit.
Requirements: Who Qualifies for the Child Tax Credit?
To qualify for the child tax credit in the 2023 tax year, which applies to tax returns filed in 2024, taxpayers and their qualifying child must meet several criteria:
- Age: The child should be under 17 by the end of 2023.
- Relationship: The claimed child must be your son, daughter, stepchild, foster child, sibling, half-sibling, step-sibling, or a descendant of any of these individuals (such as grandchild, niece, or nephew).
- Financial Support: You must have provided at least half of the child’s financial support last year.
- Citizenship: The child must be a US citizen or US resident alien and should possess a valid Social Security number.
- Dependent Status: You must be able to claim the child as a dependent, and they cannot file a joint tax return except for specific refund purposes.
- Residency: The child must have lived with you for at least half the year, with some exceptions.
- Income: There are income limitations for parents or caregivers claiming the credit. If your income exceeds a certain threshold, the credit is gradually reduced until it is phased out completely.
Additional Child Tax Credit
Suppose you’re eligible for the Child Tax Credit (CTC) but can only utilize the total amount if your tax liability is lower than the credit. In that case, you may qualify for the Additional Child Tax Credit (ACTC). To claim the ACTC, you must meet the income and dependent criteria for the CTC.
The other requirements include earnings of at least $2,500 or three or more qualifying dependents. Furthermore, earned income is from jobs or self-employment, excluding passive sources like dividends or pensions. Neither you nor your spouse (if filing jointly) can exclude foreign-earned income using Form 2555 or Form 2555-EZ.
The IRS calculates your ACTC by multiplying your earned income above $2,500 by 15%. You can claim either this amount or the unused portion of your CTC, whichever is lower. However, for the 2023 tax year, the maximum refund per qualifying dependent is capped at $1,600.
How to Claim the Child Tax Credit in 2024?
To claim the child tax credit for the tax year 2023, file your federal tax return (Form 1040 or 1040-SR) by April 15, 2024, or by October 2024 with a tax extension. Along with your tax return, complete Schedule 8812 (Credits for Qualifying Children and Other Dependents), which helps determine your child tax credit amount and any potential partial refund through the additional child tax credit.
Many reputable tax software programs guide you through claiming the child tax credit with simple interview questions, streamlining the process, and even filling out forms automatically. Additionally, you may qualify for free tax software through the IRS’ Free File program if your income is below a certain threshold.
When Should you Expect your Child Tax Credit Refund?
If you’ve claimed the additional child tax credit on your tax return, it’s important to note that the IRS can only issue refunds in mid-February by law. For those who opt for direct deposit and file electronically without errors, refunds are expected to be deposited into their accounts by February 27, 2024, according to the IRS. However, if you file by paper, expect a longer wait time for your refund. Utilizing the IRS’ ‘Where’s My Refund’ tool can provide updates on the status of your refund.
Consequences of a Child Tax Credit Error
Errors on your tax form, especially regarding the child tax credit, can lead to various consequences, including refund delays or denial of the credit by the IRS. If your claim for the Child Tax Credit (CTC) is denied:
1. You must repay any CTC amount you received in error and accrued interest.
2. In case of an incorrect claim, you could face a penalty of up to 20% of the claimed credit amount.
3. You may need to file Form 8862 (Information To Claim Certain Credits After Disallowance) before reclaiming the CTC.
State Child Tax Credits
Besides the federal child tax credit, several states like New York, Colorado, and California provide state-level CTCs. You might qualify for these additional credits when filing your state tax return. For more information, visit your state’s Department of Taxation website.
What is the $500 Credit for Other Dependents (ODC)?
The $500 credit for other dependents (ODC) is available if you have a child or relative who doesn’t fully meet the Child Tax Credit (CTC) criteria but qualifies as a dependent. This non-refundable credit can provide additional tax relief. The IRS offers a tool to help determine if your dependent qualifies for this credit.
Child Tax Credit vs Child and Dependent Care Credit
While they may sound similar, the ‘child and dependent care credit’ and the ‘child tax credit’ serve different purposes. The child tax credit provides tax relief for individuals with children, while the child and dependent care credit assists working parents or caregivers in offsetting expenses like day camp or after-school care. It’s important to note that these credits have separate rules and eligibility criteria.
History of the Child Tax Credit
The Child Tax Credit (CTC) was introduced in 1997 at $500 per qualifying child. Over time, it expanded to $1,000 per child in 2001 and became partially refundable. Further enhancements followed, with the maximum credit doubled to $2,000 per child in 2017 under the Tax Cuts and Jobs Act. The American Rescue Plan Act of 2021 temporarily expanded the CTC, increasing the maximum amount and making it fully refundable for tax year 2021.
When Will I Get My Tax Refund with the Credit?
If you file electronically and opt for direct deposit, the IRS issues refunds within 21 days. However, processing may take longer if your return has errors or omissions. Returns claiming the Additional Child Tax Credit may also experience delays. You can track your refund status using our tool.
Conclusion
The Child Tax Credit is a crucial family lifeline, adapting over time to offer increased financial relief. As legislative changes continue to shape its scope and impact, understanding eligibility and potential benefits remains essential for families dealing with the tax landscape. Use Beem to file your income taxes at the best rate and receive the most refund. Use Beem’s free Tax Calculator to quickly and accurately estimate your federal and state tax refund.
