FINANCE
Understanding the Expanded Child Tax Credit
EXPECTED READ TIME:5 minutes
One of the most significant pandemic-era tax changes we’ve seen in recent years continues to be the expansion of two tax credits: the Child Tax Credit and the Child and Dependent Care Tax Credit (CDCTC).
Here’s what you need to know to claim the maximum amount of these credits. (Remember to consult a licensed tax professional for the most up-to-date information on tax laws in your area.)
What Is the Expanded Child Tax Credit?
The The Child Tax Credit was introduced in 1997 as part of the Taxpayer Relief Act. Originally, it offered taxpayers a tax credit of up to $2,000 for each qualifying dependent.
The 2021 American Rescue Plan introduced the Expanded Child Tax Credit, which increased the amount of the credit for the 2021 tax year. It also allowed taxpayers to claim up to half of this credit in advance. The remainder of the credit was then applied when taxpayers filed their annual tax return.
Most families still receive around half of their tax credit through advance payments and receive the remaining, refundable portion when they file their annual tax return. The cap on the refundable amount of the Child Tax Credit has increased for the 2023 tax year and will increase again for 2024 and 2025 to account for inflation.
Do I Qualify for the Child Tax Credit?
Eligibility for the Child Tax Credit is based on your income and the eligibility of your dependents.
Income
Families with lower incomes can claim the full tax credit, while higher-earning families may only be able to claim part of the credit. The amount of the Child Tax Credit you can claim is based on your modified adjusted gross income, meaning your pre-tax income after your allowable tax deductions.
Income Cutoffs for Child Tax Credit
The table below shows how much of the tax credit a filer can claim based on their family income.
| Amount of Tax Credit Received | Modified Gross Adjusted Income Cutoff |
|---|---|
Full child tax credit | $400,000 and below married filing jointly $200,000 and below for all other filers |
Credit may be reduced by $50 for each $1,000 that your income exceeds the cutoff |
Above $200,000 for all other filers |
Dependent Requirements
In addition to qualifying by income, you must also make sure you can claim your dependents. Some of the requirements to claim a dependent include that the individual:
- Is a U.S. citizen, U.S. resident alien, U.S. national, or resident of Canada or Mexico
- Is under a certain age (typically under 18 or under 23 for enrolled students)
- Received at least half of their financial support from you during the last year
- Lived with you for more than half the tax year (except in certain cases such as college students or youths held in detention centers)
- Can’t provide more than half of their own financial support
- Can’t file a joint tax return with someone else
Some exceptions apply such as in the case of permanently or totally disabled adult children. In these cases, your family member must meet the same criteria above except that the age requirement doesn’t apply.
Families with lower incomes can claim the full tax credit, while higher-earning families may only be able to claim part of the credit.
How Will the Child Tax Credit Affect My Taxes?
If you claimed your child tax credit in advance, then you should expect a smaller tax refund than usual. This is because you have already received part of your refund early. And depending on your other deductions, you may end up owing the IRS.
How Do I Claim the Rest of My Child Tax Credit?
You can claim the remainder of your tax credit on your federal tax return (Form 1040 or 1040-SR). You’ll need to complete and attach Schedule 8812, Credits for Qualifying Children and Other Dependents.
Childcare expenses covered with your FSA cannot count toward your tax credit.
Are the Child Tax Credit and the Child and Dependent Care Credit the Same Thing?
Although they sound similar, the child and dependent care credit and the child tax credit are two separate things. The care credit is a tax credit for working adults who must pay someone to care for their dependents while they are at work or looking for work. These dependents are often children, but could also include disabled spouses, siblings, or parents for whom the tax filer is responsible.
The CDCTC offers different amounts of relief to taxpayers depending on whether they are working or looking for work. Usually, taxpayers can claim a maximum of $3,000 for one qualifying dependent or $6,000 for two or more qualifying dependents if they have to pay for caregiving in order to go to work. Tax filers who must pay for childcare while they look for work can claim 20-35% of their care expenses.
While there is no income cutoff for claiming the Child and Dependent Care Tax Credit, the amount you can claim may be reduced if you’re in a higher income bracket.
Although they sound similar, the child and dependent care credit and the child tax credit are two separate things.
Can I Claim Both Tax Credits?
Taxpayers who qualify for the child tax credit and also qualify for the child and dependent care credit can claim both tax credits during the same year. These are two separate tax credits that provide different kinds of support for parents and caregivers.
What if I Have a Dependent Care Flexible Spending Account (FSA)?
Childcare expenses covered with your FSA cannot count toward your tax credit. Since money put into FSAs is deposited pre-tax, you’ve already received a tax credit on that money, which is why it can’t count toward your Child and Dependent Care Credit.
However, if your care costs exceed what was in your FSA, you can deduct the difference through the Child and Dependent Care Credit.
The Takeaway
Now that you know how to maximize deductions for your children and dependents, it’s time to get started on filing. Start early so you can begin thinking about how to use that tax refund. Will you use it to boost your savings? Pay down debt? Start an emergency fund?
Ready for a Bigger Tax Refund?
Discover five ways to get more back when you file this year.
