Child Tax Credit: What Is It and How to Qualify

The child tax credit has been around since 1997, and it was expanded in 2001, but it got even better with 2018's tax reform. The Tax Cuts and Jobs Act boosted the amount of the credit significantly, and it also raised the income limits for claiming it, making it available to many more taxpayers.

The TCJA made some other minor tweaks to the credit as well. The end result of these changes is that you might get a gift from the Internal Revenue Service just for having kids.

How Much Is the Credit Worth?

The Economic Growth and Tax Relief Reconciliation Act of 2001 gradually increased the child tax credit from $500 to $1,000, and that’s where it stayed until 2017. The TCJA has doubled that. The credit is now worth up to $2,000 per qualifying child.

The IRS isn’t just saying, “OK, you have children so we’ll take up to $2,000 off your tax bill and maybe throw a little extra money at you besides.” If you have three children, that works out to $6,000. And if your credit eliminates what you owe in taxes, you can be eligible to receive up to $1,400 of anything that’s left over as a tax refund.

It used to be that you had to take extra steps to claim another separate credit, the additional child tax credit, if you wanted to claim any unused portion of the child tax credit as a refund. The TCJA more or less rolled the two credits into one. The $1,400 amount is indexed for inflation, so it can be expected to increase slightly from year to year to keep pace with the economy.

CTC Refund Example

Here’s an example of how the refundable portion of the credit works: You have one child, so you’re eligible for the $2,000 credit. You realize that you owe the IRS $500 when you finish your tax return. The child tax credit eliminates that debt, and you would still have $1,500 of the credit left over.

You have earned income of $30,000 for the year. The refundable portion of the credit is equal to 15 percent of your income over $2,500, or $27,500. And 15 percent of $27,500 is $4,125.

No, you won’t be receiving $4,125 from the IRS because that’s more than the refund cap. Remember, the refund is “up to” $1,400. But you will at least get $1,400 from the IRS because you’ve qualified up to the full limit.

The Rules for a Qualifying Child

Of course, the IRS isn’t that generous, and numerous rules and requirements apply to the child tax credit. First, make sure that your child qualifies.

  • She must be no older than age 16 on the last day of the tax year.
  • You must claim her as your dependent on your income tax return. 
  • She must have lived with you for more than six months out of the year, although temporary absences, such as if she lives away at school for a while, are OK.
  • She must be related to you in some way, although the IRS is pretty flexible with this rule. Of course, she qualifies if she’s your biological or adopted child, but she can also qualify if she’s your stepchild, foster child, sibling, step-sibling, half-sibling, grandchild or niece. 
  • Your child can’t have paid for more than half of her own support needs during the tax year if she happens to work or otherwise have income.
  • Your child must also be a U.S. citizen, U.S. national or resident alien. 
  • Your child must have a valid Social Security number that was issued before the date you file your tax return. 
  • Your child can’t file a joint return with her spouse if she happens to be married, unless it’s for the sole purpose of claiming a refund – in other words, they had no tax liability.

The Social Security number rule is a new wrinkle introduced by the TCJA, so don’t assume that you qualify for the child tax credit for your younger child this year because you qualified with your older child last year. Make sure you have that Social Security number.

There Are Income Limits Too

Take a deep breath – that refund isn’t in your hands quite yet. You must also meet certain income requirements to qualify for the child tax credit, although the TCJA has made this rule pretty generous.

This is a “phaseout” tax credit. This means that the full $2,000 per child credit begins reducing as you earn more income, until you finally won’t qualify for the credit at all. But the thresholds are now pretty high: $200,000 for single taxpayers and those who qualify as head of household, and $400,000 if you’re married filing jointly. This is up from $75,000 and $110,000 respectively before 2018.

CTC and Income Threshold Example

If you earn more than these income thresholds, your child tax credit reduces by 5 percent of the amount you go over. Maybe you have income of $205,000 for the year, and you’re a single taxpayer. Five percent of that $5,000 in income that went over the limit is $250. Your child tax credit therefore drops from $2,000 to $1,750 as a result: $2,000 less $250, or 5 percent of $5,000.

But here’s a bit of good news. You’re earning a pretty comfortable income if you pass these thresholds, and the thresholds aren’t your gross income, but rather your modified adjusted gross income, or MAGI.

So What's Your MAGI?

You can determine your MAGI by first calculating your adjusted gross income. This will appear on line 7, located on page 2 of the new 2018 Form 1040 when you complete your federal tax return.

Tips

  • Basically, your AGI is your gross earnings less certain above-the-line adjustments to income – tax deductions that you can take without itemizing.

The “above the line” tag is due to the fact that you can claim these deductions right off the bat, before you reduce your taxable income even further by claiming either the standard deduction or itemizing.

As of tax year 2019, these above-the-line adjustments to income include contributions you might have made to a health savings account or to your individual retirement arrangement, as well as student loan interest you might have paid during the tax year for yourself, your spouse or dependents.

They include moving expenses if you’re in the military and must relocate due to a permanent change of station. If you happen to be self-employed, they also include your costs of health insurance, contributions to a retirement plan and half of the self-employment taxes you must pay.

Now Calculate Your MAGI

OK, you’re halfway there. Now add to your AGI any tax deductions you took for foreign earned income or foreign housing exclusions. That's it. The result is your MAGI for child tax credit purposes.

Most taxpayers don’t take these deductions, so in all likelihood, your MAGI for child tax credit purposes is the same as your AGI, just as it appears right there on line 7 of your 1040 form. You won’t necessarily calculate your MAGI in this same way for other tax breaks and credits. The MAGI rules can be marginally different for each.

The Credit for Other Dependents

The TCJA made another significant change to the child tax credit in 2018, expanding it to create a credit for older dependents as well. So don’t think you’re out of luck if you’ve realized that you’ve met all these qualifiers, only to realize that your dependent child turned 17 on Dec. 30 so he doesn’t meet the age requirement. You might still qualify for this new, extra tax credit.

It just won’t be as much – it’s $500 rather than $2,000. It’s been referred to as the “family tax credit,” although technically, the IRS calls it the “credit for other dependents.” But this add-on for other dependents is unfortunately a nonrefundable credit. It can decrease or erase your tax bill, but that’s about it. The IRS won’t send you part of the balance if any of the $500 is left over.

Qualifying for the “Other Dependent” Credit

Your dependent must meet all the same tax rules to be your qualifying relative for general tax purposes. So basically, if your child qualified for the child tax credit in all other respects except for his age, he would qualify for this $500 gift from the IRS if he’s under age 19, or age 24 if he’s a full-time student.

The same income thresholds and rules that apply to the child tax credit also apply to this tax credit, but your dependent doesn't necessarily have to have a Social Security number at the time you file your tax return. He must have an Individual Taxpayer Identification number or an Adoption Taxpayer Identification number, however.

What About Qualifying Relatives?

So what if your child is 25 or older, still living at home and you’re supporting her? You might still qualify for this new offshoot of the child tax credit even though she won’t qualify as your child dependent for tax purposes because she’s too old. She might be your qualifying relative instead.

According to the IRS, this would be the case if she had gross income – not AGI or MAGI income – of less than $4,200 as of 2019, and if you provided more than half of her total financial support for the tax year. She actually wouldn’t even have to live with you if you paid more than half of her household expenses so she could live elsewhere, assuming she’s your child.

Otherwise, anyone who isn’t related to you would have to live with you throughout the entire year, but yes, if that person meets all these rules, you could claim the “other dependent” credit for her, too.

What If You’re Not the Custodial Parent?

The IRS provides a possible solution if you lose out on claiming the child tax credit simply because you’re divorced or separated, and your child didn’t live with you for more than half the year.

Provided that you and your ex lived apart at all times through the last six months of the tax year, she can effectively waive the right to claim your child as a dependent for purposes of the child tax credit, giving it to you. She can sign IRS Form 8332, and you can then submit it with your tax return and claim the child tax credit.

You Might Have to File Schedule 8812

Technically, Schedule 8812 was historically used and had to be submitted to the IRS if you were claiming the additional child tax credit for a refund. But it’s still around in the 2019 tax year, and it must be filed by some taxpayers.

You must complete Part I of the schedule if your child is a U.S. resident because he meets what the IRS calls the “substantial presence test” and he isn’t a nonresident alien. This means that he was physically present in the U.S. for at least 31 days out of the current year and for 183 days during the last three years – including the current year – and one-sixth of these days occurred in the second year.

And because the additional child tax credit is now part of the child tax credit, you must complete Parts II and III and submit the form with your tax return if you want the IRS to refund any portion of the credit. The good news here is that the instructions that come with Schedule 8812 will help you figure out how much of a refund you’re entitled to.

Your CTC Refund May Be Delayed

You might have to wait a bit for your child tax credit refund thanks to some other recent federal tax legislation. The Protecting Americans from Tax Hikes Act of 2015 prohibits the IRS from issuing any tax refunds resulting from claiming the earned income tax credit or the child tax credit until Feb. 15.

Tips

  • Even if you file your tax return the nanosecond the filing season opens, you’ll have to wait a little while before you get your hands on the cash.

This applies not only to the portion of your refund that represents your child tax credit, but any excess withholding you might have paid in all year as well. In other words, the IRS will sit on your entire refund until Feb. 15.

These Child Tax Credit Rules Might Change

Keep in mind that the TCJA is set to expire at the end of 2025, and this means that its child tax credit provisions – like that $2,000 credit amount as opposed to just $1,000 and the higher income phaseout thresholds as well – could potentially disappear into thin air at that time. If Congress doesn’t act to renew the terms of the TCJA, or even to revamp the child tax credit itself to keep these terms in place, the credit will revert back to the old rules as of Jan. 1, 2026.

If your MAGI is $205,000 in that year and you’re single, you won’t qualify for the child tax credit because the income limit for this tax filing status would drop back to $75,000. And 5 percent of the difference – $130,000 – works out to $6,500, which totally eliminates the $1,000 credit.

The expiration of this legislation would affect the refundable portion of the tax credit as well. Remember, your refund is currently equal to 15 percent of your earnings above $2,500. This would revert back to the level it was at in 2017: $3,000 – $500 more – so you’d be calculating that 15 percent on less income.

You can say goodbye to the $500 tax credit for other dependents as well if the TCJA expires.

References

About the Author

Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.