If you have children or other dependents under the age of 17, you likely qualify for the Child Tax Credit. This credit reduces your federal income tax bill by up to $2,000 per child for the 2020 tax year. Starting with the 2018 tax year, there have been notable changes to this tax credit. These changes include a higher income limit amount and the requirement for your child to have a Social Security number to qualify.
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What Is the Child Tax Credit?
The Child Tax Credit (CTC) is designed to give an income boost to the parents or guardians of children and other dependents. It only applies to dependents who are younger than 17 as of the last day of the tax year. The credit is worth up to $2,000 per dependent for tax years 2020 and 2021, but your income level determines exactly much you can get. You need to have earned at least $2,500 to qualify for the CTC. Then it phases out for income above $200,000 for single filers and $400,000 for joint filers. If your earned income is above the applicable threshold, you will get a partial credit.
As a reminder, tax credits directly reduce the amount you owe the IRS. So, if your tax bill is $3,000 but you’re eligible for $1,000 in tax credits, your bill is now $2,000. This differs from a tax deduction, which reduces how much of your income is subject to income tax.
The CTC is refundable up to $1,400. That means if you qualify for the CTC and it brings your tax liability (how much you owe) below zero, the IRS will send you the remaining amount of the credit, up to $1,400.
Recent Changes to the Child Tax Credit
The Tax Cuts and Jobs Act of 2017 brought some big changes to the U.S. tax code. These changes went into effect for the 2018 tax year and apply to 2020 taxes. This new tax plan included the following changes to the CTC:
- The credit amount (per child) increased from $1,000 to $2,000.
- The CTC is refundable up to $1,400. It previously was not refundable.
- Children must have a Social Security number to qualify.
- The earned income threshold to qualify for the CTC is $2,500.
- The CTC phases out at an income level of $200,000 for single filers and $400,000 for joint filers. In 2017 the phase-out level was $75,000 for single filers and $110,000 for joint filers.
- There is now a $500 (non-refundable) credit available for each dependent older than 17.
Another big change was that the new tax plan largely combined the Additional Child Care Tax Credit (ACTC) with the CTC. This is part of the reason the CTC became refundable and its limits increased.
Which Dependents Are Eligible for the Child Tax Credit
Eligibility for the CTC hinges on a few factors. The child you claim as your dependent has to meet six IRS tests:
- Age Test: The child was under age 17 (so 16 or younger) at the end of the tax year.
- Relationship Test: The child is your daughter, son, stepchild, foster child, adopted child, brother, sister, stepbrother, stepsister, half sister or half brother. The child can also be the direct descendant of any of those just mentioned (e.g. your grandchild, niece or nephew).
- Support Test: The child did not provide more than half of their own “support.” This is money they use for living expenses. The child also cannot file a joint return that year.
- Dependent Test: The child must be claimed as your dependent on your federal tax return.
- Citizen and Resident Test: The child must be a U.S. citizen, a U.S. national or a U.S. resident alien. Starting with the 2018 tax year, the child must also have a Social Security number.
- Residency Test: The child must have lived with you for more than half of the tax year.
Child Tax Credit Income Limits
In addition to the six tests mentioned above, your income determines whether or not you can claim the CTC. First, you need to have earned income of at least $2,500 to qualify for the credit. Then, as your adjusted gross income (AGI) increases, the child tax credit begins to phase out.
So, when you breach a certain income threshold (the phase-out level), you’re only eligible for a partial credit. As your income increases, the amount you can claim continues to decrease until you can’t claim the credit at all.
For tax year 2019, the CTC phase-out begins at $200,000 of AGI for single filers and heads of household. You can’t claim any of the credit if your income is more than $240,000. For joint filers, the credit begins to phase out at $400,000. It phases out completely at $440,000.
Claiming the Child Tax Credit
Eligible filers can claim the CTC on Form 1040, line 12a, or on Form 1040NR, line 49. To help you determine exactly how much of the credit you qualify for, you can use the Child Tax Credit and Credit for Other Dependents Worksheet provided by the IRS.
If you need to file a return for a year before 2018, you can only claim the credit on Forms 1040, 1040A or 1040NR.
How Much of the Child Tax Credit Is Refundable?
For 2020 and 2021, up to $1,400 of the CTC is refundable. (Previously, the CTC was entirely non-refundable.) So if your 2020 and 2021 tax bills are zero, you may be able to get a $1,400 refund for every eligible child. This amount is also indexed to inflation, so it will increase slightly each year.
However, the new tax law also caps the refundable portion of the CTC to 15% of your earned income that exceeds $2,500. That means you need to have at least $11,830 of earned income to qualify for the full refund of $1,400.
The Additional Child Tax Credit (ACTC)
Before the new tax law made the Child Tax Credit refundable, some filers were eligible for the Additional Child Tax Credit (ACTC). This credit effectively gave you a refund if the CTC reduced your tax bill to less than zero. (Remember that the CTC was previously not refundable.) The ACTC is largely phased out, but if you need to file a return for a tax year previous to 2018, you can find information for the ACTC on the Form 1040.
The Credit for Other Dependents (ODC)
Starting with the 2018 tax year, there is an additional $500 Credit for Other Dependents (ODC). This allows you to claim non-child dependents, such as a parent, and dependents who are college students (under age 24). The eligibility requirements are very similar but you cannot claim the ODC for a dependent who qualifies for the CTC.
The Child and Dependent Care Tax Credit (CDCTC)
Another similar credit is the Child and Dependent Care Tax Credit (CDCTC). You can claim this credit if you have earned income and if you’re paying someone else to care for a dependent. Unlike the CTC, which you can only claim if you’re the parent or guardian of minor children, you can claim the CDCTC for aging parents and other disabled relatives. Qualifying dependents for the CDCTC include the following:
- Children who are 12 or younger at the end of the tax year
- Dependent adult family members or spouses who are not able to care for themselves due to mental or physical impairments, unless they had gross income of $4,150 or
With the CDCTC, you can claim a credit for up to 35% of qualified care expenses. The exact percentage that you are eligible to deduct depends on your income level. The maximum amount of care expenses to which you can apply the credit is $3,000 if you have one dependent and $6,000 if you have more than one dependent. That means the largest possible credit is $1,050 with one dependent and $2,100 with multiple. The CDCTC is non-refundable.
According to the IRS, expenses that qualify for the CDCTC include money that you paid “for household services and care of the qualifying person while you worked or looked for work.” Child support payments do not qualify.
To claim the CDCTC, you need to fill out Form 2441.
State Child Tax Credits
Some states offer a complementary state-level CTC and/or CDCTC that matches part or all of the federal credit. In some states, the credits are refundable and in other states they are not. This state-by-state guide breaks down which states offer their own Earned Income Tax Credit, CTC or CDCTC.
The IRS offers child tax credits to help parents and guardians offset some of the costs of raising a family. If you have a dependent who isn’t your direct child, you may also be eligible to claim a credit. And because some child tax credits are refundable, you might even make some money when all is said and done.
For further help reducing your tax bill, consider working with a financial advisor who specializes in taxes to craft a financial plan. Having a financial plan can be key to ensuring you’re taking everything into account come tax season. Our financial advisor matching tool can help you find a professional to work with to meet your needs. Just answer some questions about your location, your financial situation and your goals, and you’ll be matched with up to three advisors in your area. You can then interview them on the phone or in person and choose who to work with.
Tips for Saving Money on Your Taxes
- A financial advisor can help you optimize your tax strategy for your family’s needs. SmartAsset’s free tool connects you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors, get started now.
- To make sure you don’t miss a credit or deduction that you qualify for, use a good tax software. SmartAsset evaluated common tax filing services to find the best online tax software for your specific situation.
- Some savings options, like a health savings account (HSA), dependent care or health care flexible spending account (FSA) or 401(k), allow you to contribute pre-tax money. With a dependent care FSA, that means you are not paying taxes on contributions that you then spend on dependent care. This decreases your taxable income and could potentially drop you into a lower tax bracket. Even if your contributions didn’t change your bracket in the past, make sure to check the current tax brackets. They may have changed since you last filed, so contributing slightly more might now help you to really boost your savings.
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