Additional Child Tax Credit: What is It & Do I Qualify?
It’s a parents job to support their children, and doing so isn’t cheap. In 2015, the U.S. Department of Agriculture reported that raising a child to the age of 17 costs about $233,000. This figure doesn’t take college tuition into account.
Fortunately, the IRS understands that children are amazing but expensive creatures. To help offset the expenses of raising one, the agency offers a child tax credit and an additional child tax credit (ACTC). These credits can be extremely beneficial to eligible taxpayers, so let’s see if you are one of them.
What is the Additional Child Tax Credit for 2020?
In order to understand the ACTC, you must first understand the child tax credit since the two work together. In 2020, eligible taxpayers with children are allowed to take a tax credit of up to $2,000 per child. Yes, you read that right – you can get a credit of up to $2,000 for each one of your children. We’ll talk about who is eligible later. For now, it’s enough to understand that the IRS bases this credit on your income.
The child tax credit is a nonrefundable credit. This means it can reduce your tax liability to zero, but it goes no further. Let’s say you owe $2,000 in taxes for the year. If you qualify for the full child tax credit of $2,000, your tax is now $0.
But what if your federal tax was only $1,500? In this case, your tax liability still becomes $0. But the extra $500 worth of child tax credit that you didn’t use just disappears in a puff of smoke and you lose it. To remedy this problem, the government created the ACTC.
Worth up to $1,400 in 2020, the ACTC is a refundable credit that lets you benefit from the full child tax credit. This is a little tricky, so let’s return to our previous example t see how it works.
You owe $1,500 in taxes, but you’re eligible for the entire $2,000 child tax credit. As it did before, the child tax credit will reduce your liability to $0. But, in this scenario, your extra $500 of tax credit doesn’t disappear in a puff of smoke. Instead, if you’re eligible, you can take the ACTC. This credit is refundable. That means now that your tax liability is $0, and you’re extra $500 worth of credit gets refunded to you.
To explain it another way, the child tax credit and the ACTC work together. The child tax credit reduces your tax. If there is any credit left over, it rolls over to the ACTC and pays you rather than the IRS.
Who Can Claim This Credit?
Unfortunately, not everyone qualifies for the ACTC. In order to claim the credit, you must first be eligible for the child tax credit. If you’re not eligible for the child tax credit, you’re not eligible for the ACTC. This also means, of course, that you must have a qualifying child to take the credit.
Note too that a single child can only be claimed once per tax year for this credit. If, for example, you and a former spouse share custody of your child, you could both be eligible for the credit. But the IRS will only allow one of you to take it. In this case, the IRS uses a set of tie-breaker rules to determine who can take the credit. When all else fails, the tie-breaker is usually income. The IRS typically allows the parent with the highest AGI to claim the child as a deduction.
If you don’t like the IRS’ tie-breaker rule, you and the child’s other parent may come to your own agreement. A popular solution is sharing, with each parent taking the credit every other year.
Qualifying Child Requirements
You need at least one qualifying child to be eligible for the child tax credit and the ACTC. In order to qualify, a child must meet several requirements. First, they must be 16 years of age or younger on the last day of the year. The child must also be a United States citizen.
In order to take the child tax credit and ACTC, you must also claim your child as a dependent on your taxes. It’s further required that you be related to the child in question, but not necessarily by blood. The child can be your son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, grandchild, niece, or nephew. Your adopted children are, of course, eligible for the credit as are children living with you in preparation for adoption and foster children.
The child you’re claiming for the credit must also live with you. If your child sometimes stays elsewhere, you can still claim them so long as they lived with you for more than half the year. The final requirement is that the child in question not pay for more than half of their own financial support.
Rules change so it’s important to check them before claiming a child for the child tax credit and the ACTC. Generally, however, a child who counts as an exemption will count towards the child tax credit.
Income Requirements and Limitations
The ACTC aims to help working families, so you must have at least $2,500 worth of earned income to qualify for the ACTC. Note the use of the word “earned.” Interest, dividends, unemployment and other passive income streams don’t count. You must have $2,500 of earned income from work or other active endeavors to qualify.
Just as there is an income minimum to qualify for the credit, there is also a maximum. Married families filing jointly will see their credit start to phase-out if their adjusted gross income (AGI) is more than $400,000. Those filing their tax return under other filing statuses are subject to the phase-out if their AGI exceeds $200,000.
The phase-out works like this: You lose $50 worth of your child tax credit and ACTC for every $1,000 or part of $1,000 that your income exceeds the limit. If you’re married filing jointly but your AGI was $405,000, your child tax credit is reduced by $250.
What Is the IRS Form 8812?
The IRS isn’t the most trusting organization, and they often ask taxpayers to justify the decisions they make during their tax preparation. In the case of the ACTC, the IRS asks taxpayers to file a Form 8812 along with their taxes.
This form will help you accurately calculate your ACTC and show the IRS your work. This helps everyone involved. You’ll know you calculated the credit correctly and the IRS can catch and correct any innocent mistakes in your calculations quickly and easily in order to fix them without a lot of fuss and auditing.
Extra Child-Related Tax Savings
If you qualify for the child tax credit or the ACTC, you may also qualify for other tax credits related to your children. One is the Child and Dependent Care Credit, which can provide up to $3,000 per child to help offset the cost of child care.
The IRS also offers the Adoption Tax Credit. If you have adopted or are in the process of adopting a child, this credit may shave a few dollars off of your taxes. Certain education credits are also available for some children if you’ve enrolled them in a qualifying program.
Even if you don’t qualify for additional credits, changing your filing status may prove beneficial. If you are unmarried and your child lives with you, you might be eligible to file your taxes using the head of household status. This status allows for a higher standard deduction and may benefit you more than other filing statuses.
Because the child tax credit and the ACTC work together, you’ll need to understand two tax credits rather than just one. Don’t let that steer you away from exploring these credits, however, as they can provide a hefty tax break at the end of the year. Even better, you need not track your receipts or do anything special to take these credits since both are based on income. You will need to file an extra form with your taxes, but tax preparation software programs will complete that task for you.
As always, Picnic Tax is here for you if you get stuck or have any questions about the child tax credit or the additional child tax credit. We can help you determine whether or not you qualify and calculate how much of the credit you can take. We’re also happy to help you examine other tax credits related to having children so you can make sure you don’t miss any credits or deductions. Talk to an accountant today and let us help you get the highest tax refund you can.