For families, claiming the child tax credit is a powerful way to reduce their tax bill. The credit provides eligible taxpayers with a reduction in tax liability of up to $2,000 per qualifying child.
Sounds pretty valuable, right? It is. So if you suspect that you qualify, it's worth exploring what the child tax credit is and how to claim it.
"Everyone who is eligible should consider and take the child tax credit," wrote Phyllis Jo Kubey, enrolled agent and certified financial planner in New York City, in an email. "Generally, if you have a qualifying child who was under age 17, who has a Social Security number, you're eligible."
Here's what to know about claiming the child tax credit.
What Is the Child Tax Credit?
The child tax credit, or CTC, is a federal tax credit available to eligible families who have one or more qualifying child.
How Much Is the Child Tax Credit?
For 2020 income, it reduces the tax liability of eligible taxpayers by up to $2,000 per child. So an eligible family with two qualifying children could deduct up to $4,000.
To comprehend the true value of the child tax credit, it's important to understand what a credit is, Kubey says. Unlike a tax deduction, which reduces your taxable income, a credit creates a dollar-for-dollar reduction of your tax bill. What's more, this is a refundable credit. That means it can actually slash your bill by more than you owe, by up to $1,400 per qualifying child. This refundable portion is called the additional child tax credit, or ACTC, Kubey says.
There is also a related $500 nonrefundable credit for those who do not qualify for the child tax credit. It may be available to taxpayers, for example, if they have dependents over the age of 17 who are college students.
Changes to the Child Tax Credit
Tax reform doubled the maximum amount this credit is worth from $1,000 per child. Higher earners are also eligible to claim this credit after tax reform.
Who Is Eligible to Claim the Child Tax Credit?
Taxpayers must have eligible children and earn below a certain income threshold to qualify for the $2,000 credit. Above those thresholds, which are $200,000 for single filers and $400,000 for those married and filing jointly, that amount is phased out, or reduced, until it's no longer available. These income cutoffs were increased with tax reform, Kubey says.
Keep in mind that you need to have a qualifying child to claim the credit. That child must be a son, daughter, stepchild, adopted child or foster child, or a descendant of one, such as a grandchild. They may also be a sibling or half-sibling, stepsibling or even a niece or nephew. The child must have a Social Security number and be younger than age 17 at the end of the tax year. They should live with you at least half the year and not provide their own support.
"It's tricky because most of us think of 18 as the age below which people are children, but the child tax credit uses 17 as the cutoff," wrote Charles Capetanakis, certified public accountant and partner at Davidoff Hutcher & Citron in New York, in an email. "The keys to remember are: each dependent child under 17 at the end of the tax year who are American citizens."
How Can I Claim the Child Tax Credit?
You'll need to file a federal tax return to claim the child tax credit. Because this credit is tempting to fraudsters, you may have to verify that you're claiming it legitimately. Kubey notes that tax preparers have additional due diligence requirements when working with clients who claim this credit. If you're claiming the ACTC, you may also find that your refund is delayed, just like it is when you claim the earned income tax credit.
Keep in mind that you'll need to gather the Social Security numbers of your dependents and that you can't claim a child who is already claimed by someone else. If you're co-parenting with an ex-spouse or another partner, you'll need to coordinate with that person.
A tax software program should be able to walk you through the qualifications and let you know if you're eligible to claim the child tax credit. "If you use commercial tax software and have entered your children's information correctly, the software should calculate the credit automatically," Kubey says.
What If I Forgot to Take the Child Tax Credit Last Year?
If you think you qualified -- and your children qualified -- to take the credit last year, but you forgot to claim it, go back and amend your original tax return for the previous three years. Keep in mind that your qualifying children must have had Social Security numbers during those years, and you'll need to use the relevant tax laws of the year in which you're filing, not the current tax year.
If you are eligible, it's worth doing what you can to take this credit. After all, children are expensive. The child tax credit provides a little bit of relief.