Parents will notice a number of tax breaks for families with children when they file their 2023 tax return this year: The child and dependent care credit, a higher earned income tax credit if you have children, the adoption credit, and 529 plan tax advantages to name a few. But, for many parents, the most important kid-related tax benefit is the child tax credit.
Nevertheless, many parents don’t know the ins and outs of this valuable income tax credit. Plus, there’s a new level of confusion surrounding the credit because of recent enhancements that were only temporary. There’s also a lot of talk lately about bringing back some of the temporary enhancements. As a result of all this, parents aren’t sure which features actually exist now, which ones existed for only one year, and which ones might come back. Lastly, recent legislation passed in the House of Representatives now looks set to increase the credit’s value but the ultimate changes rest with the Senate and whether the bill gets passed into law as currently approved, or at all.
As a parent myself, I know how tax breaks like the child tax credit can help a family’s bottom line. So, I’m thrilled to be able to clear up any uncertainty other parents might have about the credit’s qualifications, amount, refundability, advance payments, and more. With the following answers to common questions about the credit, I hope you’ll be able to take full advantage of the child tax credit when you file your 2023 federal income tax return this year. Plus, we’ll cover the recent legislation passed by the House and whether it means you should wait to file your return until later in the tax season.
WealthUp Tip: Federal income tax returns for the 2023 tax year are due April 15, 2024, for most people (April 17 for residents of Maine and Massachusetts).
Table of Contents
Do I Qualify for the Child Tax Credit?
The first question parents might have is whether they even qualify for the child tax credit. The short answer is that you’re generally eligible for the credit on your 2023 federal tax return if you have a dependent “qualifying child” who is 16 years old or younger on Dec. 31, 2023.
You (or your spouse if you’re filing a joint return) must also have a valid Social Security number or individual taxpayer identification number (ITIN) by the due date of your return (including any tax return filing extensions).
To be your dependent, the child must be either your:
— Foster child
— A descendant of any of the above (e.g., your grandchild, niece, or nephew)
You also can’t claim a child as your dependent if you (or your spouse you’re married filing jointly) can be claimed as a dependent on someone else’s tax return.
WealthUp Tip: An adopted child, or a child placed with you for legal adoption, is treated as your own child for purposes of the child tax credit.
Is My Child a “Qualifying Child” for Child Tax Credit Purposes?
In addition to the age (under 17 years of age) and dependency requirements, your child must satisfy several other requirements for you to claim the child tax credit for the 2023 tax year.
To be a “qualifying child” for purposes of the child tax credit, your dependent child generally must also:
— Provide no more than half of their own financial support during the year
— Live with you for more than half of the year
— Not file a joint tax return for the tax year, unless for the sole purpose of claiming a refund of withheld income taxes or estimated taxes paid during the year
— Have a valid Social Security number by the due date of your return (including extensions)
— Be a U.S. citizen, U.S. national, or U.S. resident alien
The IRS also has an online tool to help you determine if your child is a “qualifying child” for purposes of the child tax credit.
WealthUp Tip: If your dependent child (or another dependent) doesn’t satisfy these requirements, you still might be able to claim the “other dependents” tax credit for the child (e.g., for a dependent child who is 17 or older). The credit is worth up to $500 per qualifying dependent.
Can I Claim the Full Child Tax Credit If My Child Was Born During the Year?
Yes, you can claim the full child tax credit if your child is born (or adopted) during the year. Assuming both you and your child qualify for the credit, it doesn’t matter if your child is born at 12:01 a.m. on Jan. 1 or at 11:59 p.m. on Dec. 31—or any time in between.
This is different from the upper age limit requirement. For example, if your child turns 17 at any point during the year, you can’t claim the child tax credit for that child for that tax year.
Who Can Claim the Child Tax Credit When the Parents Are Divorced or Separated?
In most cases, the custodial parent can claim the child tax credit when a qualifying child’s parents are divorced or separated. That’s because a child must live with you for more than half of the year in order for you to claim the credit for that child.
However, a non-custodial parent can claim the credit if certain requirements are met. For example, the parents must either:
— Be divorced or legally separated under a decree of divorce or separate maintenance
— Be separated under a written separation agreement
— Live apart during the last six months of the year (regardless of any previous or current marital status)
The qualifying child must also receive more than half of his or her support for the year from the parents, and be in the custody of one or both parents for over half of the year.
Finally, the custodial parent must state in writing that he or she won’t claim the child as a dependent for the year. The non-custodial parent must also attach the statement to his or her federal tax return.
Who Can Claim the Child Tax Credit If a Child Is a Qualifying Child for More Than One Person?
A child can be a “qualifying child” for more than one person. For example, if a child lives with unmarried parents for the entire year, or lives full-time with one parent and a grandparent, then multiple people might be able to claim the child tax credit for the child.
In that case, the IRS uses the following tie-breaker rules to determine who can claim the credit for that particular child:
— If only one person is the child’s parent, that parent can claim the credit.
— If the parents file a joint return together, they can claim the credit.
— If the parents don’t file a joint return together but both of them can claim the child as a qualifying child, the parent with whom the child lived with longer during the year can claim the credit.
— If the parents don’t file a joint return together but both of them can claim the child as a qualifying child, and the child lived with each parent for the same amount of time, the parent who had the higher adjusted gross income (AGI) for the year can claim the credit.
— If neither parent can claim the child as a qualifying child, the person who had the highest AGI for the year can claim the credit.
— If a parent can claim the child as a qualifying child but no parent actually does so, the person who had the highest AGI for the year can claim the credit, but only if that person’s AGI is higher than the highest AGI of any of the child’s parents who can claim the child.
How Much Is the Child Tax Credit?
The child tax credit is worth up to $2,000 per qualifying child (that’s the maximum). There is no limit on the number of qualifying children for which you can claim the credit. So, for example, if you have 10 kids who all qualify for the child tax credit, then you can claim a total credit of up to $20,000.
However, as I’ll discuss in a moment, if your income is above a certain amount, your child tax credit is reduced—possibly to zero.
In addition, keep in mind that the maximum credit amount is scheduled to drop down to $1,000 per qualifying child starting in 2026. The Tax Cuts and Jobs Act of 2017 doubled the amount of the child tax credit, but only temporarily.
Related: Is Summer Camp Tax Deductible?
How Do the Child Tax Credit Income Limits Work?
As mentioned above, your child tax credit might be phased-out for certain high-income taxpayers. If your modified AGI is greater than $200,000 ($400,000 for married couples filing a joint tax return), then your credit amount is reduced by $50 for each $1,000 (or fraction thereof) you’re over the income limit.
For purposes of the child tax credit, “modified AGI” is the AGI reported on your tax return, plus any:
— Foreign earned income exclusion
— Foreign housing exclusion or deduction
— Exclusion of income for residents of American Samoa or Puerto Rico
As an example of how the income limits work, assume a married couple has two qualifying children and file a joint tax return for the 2023 tax year. If their 2023 modified AGI is $415,000, their child tax credit will be reduced by $750 ($50 x 15 = $750). So, instead of the maximum credit of $4,000 for their two children, the couple’s child tax credit is only $3,250 ($4,000 – $750 = $3,250).
Is the Child Tax Credit “Refundable”?
There are three basic types of tax credits: fully refundable, non-refundable, and partially refundable credits.
— A fully refundable tax credit can reduce the tax you owe below $0 and trigger a tax refund. For example, if you owe $1,000 in tax and qualify for a $1,200 fully refundable credit, you’ll get a $200 tax refund.
— With a non-refundable tax credit, the best it can do is reduce your tax to $0. For instance, if you owe $1,000 in tax and qualify for a $1,200 non-refundable credit, you won’t owe taxes but you won’t get a tax refund, either. In this case, you essentially end up losing part of the credit.
— Then there’s partially-refundable tax credits. As the name suggests, some, but not all, of a partially-refundable credit can trigger a tax refund. As an example, if you owe $1,000 in tax and qualify for a $1,200 credit, you might only get a $100 tax refund.
The child tax credit is a partially-refundable credit. However, the refundable portion—which the IRS calls the “additional child tax credit”—is restricted and limited in various ways, so not everyone can get it (or get the full amount).
For instance, the additional child tax credit is only available if your “ordinary” child tax credit is greater than what your tax liability would otherwise be without the credit.
You also must have at least $2,500 of earned income during the year to claim the refundable portion on your tax return. Earned income generally includes all the taxable income you get from your employer, such as wages, salary, and tips. If you’re self-employed, net earnings from your business also count as earned income.
WealthUp Tip: The earned income threshold will rise to $3,000 in 2026. The amount was only temporarily reduced to $2,500 by the Tax Cuts and Jobs Act.
The additional child tax credit is also limited to $1,600 per qualifying child for the 2023 tax year ($1,700 per child for 2024).
In addition, the refundable portion of the credit generally can’t exceed 15% of your earned income over $2,500. If you have three or more qualifying children, this cap can be increased to an amount generally equal to the amount of Social Security, Medicare, and Additional Medicare taxes withheld from your paychecks during the tax year, minus any earned income tax credit for the tax year.
Related: Best Tax Software for 2024
How Do I Claim the Child Tax Credit?
You must complete Schedule 8812 (Form 1040) to calculate the amount of your child tax credit. This includes any refundable amount claimed as the additional child tax credit. (Schedule 8812 is also used to calculate the credit for other dependents.)
From there, transfer the total amount of your child tax credit (non-refundable portion) and any credit for other dependents to Line 19 of Form 1040. If you qualify for the additional child tax credit, the amount is recorded on Line 28 of Form 1040.
A word of caution about claiming the child tax credit if you’re not eligible: If you mistakenly claim the credit and the IRS later determines that your error was “due to reckless or intentional disregard of rules and regulations,” you won’t be allowed to claim the credit for two years. If you claim the credit “due to fraud,” you won’t be allowed to claim the credit for 10 years. You might also be hit with a penalty.
In addition, you generally must complete Form 8862 if the IRS denies or reduces a claim for the child tax credit for any reason other than a math or clerical error, and you’re later eligible for and want to claim the credit.
Related: What’s Your Standard Deduction?
When Will I Get a Child Tax Credit Refund?
You might have heard that tax refunds are delayed for people claiming the child tax credit. Well, it’s true—to a certain extent.
Related: How to Get Your Tax Refund Fast
As an anti-fraud measure, the IRS is prohibited by law from issuing a refund until mid-February 2024 if the additional child tax credit (i.e., the refundable portion) or earned income tax credit is claimed on your 2023 tax return. This applies to the entire refund, not just the portion associated with the child tax credit or earned income tax credit.
According to the IRS, most child credit-related refunds for the 2023 tax year will be available in bank accounts or on debit cards by February 27, 2024, for taxpayers who chose direct deposit for their refunds (assuming there are no other issues with their tax return).
If you file your return after mid-February, there will be no additional delay in sending out a refund. (It typically takes the IRS less than three weeks to process an electronic, direct deposit refund payment to your bank account.)
What Enhancements Were Made to the Child Tax Credit for the 2021 Tax Year?
To help families financially impacted by the COVID-19 pandemic, the American Rescue Plan Act of 2021 made significant changes to the child tax credit. However, those changes were only effective for the 2021 tax year.
The credit enhancements included:
— Increasing the credit amount from $2,000 to $3,000 for children who were at least six years old and $3,600 for children five years old and younger
— Permitting the credit for dependent children who were 17 years old
— Making the credit fully refundable for people who lived in the U.S. for more than half of 2021 (including removing the $2,500 refundability threshold)
— Sending monthly advance payments of half of the credit amount from July to December of 2021 (the rest was claimed on your 2021 tax return)
Although not necessarily an enhancement, the 2021 credit was also phased out in two steps. First, the “extra” credit amount (i.e., the $1,000 increase for children six to 17 years old and the $1,600 increase for children 5 and under) was gradually reduced—but not below $2,000—for families with a modified AGI over $150,000 for joint filers, $112,500 for head-of-household filers, and $75,000 for other taxpayers. Second, the remaining credit was then phased-out for taxpayers with modified AGI exceeding the regular $200,000 threshold ($400,000 for joint filers).
None of these changes are in effect for the 2023 tax year.
Related: Best Investments for Teenagers
Will the Child Tax Credit Amount Go Up?
There’s a bipartisan bill working its way through Congress that would make a number of temporary improvements to the child tax credit. The bill has already passed in the House of Representatives. Although they wouldn’t bring back monthly payments, the changes would boost both the “ordinary” and refundable credit amounts.
For example, if passed and signed into law, the legislation would enhance the child tax credit by:
— Allowing the $2,000 maximum credit (non-refundable portion) to be increased annually to account for inflation (2024 and 2025 tax years)
— Raising the $1,600 limit on the refundable portion of the 2023 credit to $1,800 ($1,900 for 2024 and $2,000 for 2025)
— Increasing the 15%-of-earned-income cap on the refundable portion of the credit by multiplying it by the number of qualifying children (2023 to 2025 tax years)
— Permitting use of the previous year’s earned income to calculate the 15%-of-earned-income limit on the refundable portion of the credit (2024 and 2025 tax years)
Lower-income taxpayers, who often aren’t able to claim the full credit because their tax liability is less than their credit amount, would benefit the most from these changes (particularly from the higher refundable credits).
The IRS says that you should file your return as soon as it’s ready. As the bill is currently written in the House of Representatives, you won’t have to file an amended return if these changes are enacted after you file your 2023 tax return. Instead, the IRS will send you a refund for the amount, if any, by which your child tax credit for the year is increased. That means the IRS can make adjustments on its end to avoid the need for filing an amended return to claim any changes instituted by the legislation passing.
But will the legislation pass the Senate? It’s too soon to tell. Unfortunately, there are just too many variables at play to make a reliable prediction. However, we’ll keep on top of this developing story and report any updates here and on the WealthUp tax page.
Related: What Tax Bracket Are You In?
Perhaps the best way to lower your federal income tax bill is push yourself down into a lower tax bracket to reduce your tax rate. On the flip side, you certainly want to avoid getting kicked into a higher bracket and increasing your tax rate.
But, of course, under either scenario you need to have a good feel for where you are right now. For that purpose, check out the federal tax brackets and rates that will apply for your next federal tax return.
Related: What’s Your Standard Deduction?
For most people, their largest and most important tax deduction is the standard deduction. However, the standard deduction amounts change every year to account for inflation. Plus, the standard deduction isn’t the same for everyone.
So, before start your tax return or jumping into tax planning mode, you’ll need to know how much your standard will be for the tax year.
Related: Capital Gains Tax: What You Need to Know
Millions of Americans sell stocks, bonds, cryptocurrency, real estate, precious metals, and other types of investment property every year. However, if you sell investments during the year, you might owe capital gains tax on any profits.
The good news is that you’ll pay a lower tax rate on capital gains when compared to income taxes on wages, tips, and other “ordinary” income. On the other hand, there are a few landmines to avoid when you sell investment property. Get all the details with our guide to the capital gains tax.