Child Tax Credit: What's New And What's Next?
The child tax credit 2023 has seen a significant cut-off as compared to the 2021 benefits under Covid special provisions. 2021 was the year when even those families received the benefits who were not eligible because they had zero income.
The remarkable impact of child tax credit payments offered under this expanded benefit has been huge and was felt by 61 million children in 36 million households according to one estimate.
In this article, you will learn:
- What is the child tax credit (CTC) and who qualifies for it?
- How to calculate and claim CTC?
- When did the child tax credit start and how has it changed over the years?
What is the Child Tax Credit?
The childcare tax credit is a tax break that is provided to families with children under 17 years of age to ease their financial burden but you need to fulfill 7 qualifying criteria to be eligible for it which we will discuss later in this article.
The emergency legislation boosted this tax benefit due to the economic downturn experienced during the Covid, however, it is now reverted to pre-2021 levels. Let’s look at what you can expect in 2023.
How the Child Tax Credit Looks in 2023
Those filing 2023 returns will see a huge reduction in CTC as compared to the previous year since the generous tax benefit introduced during the pandemic to control the economic damages has expired.
The maximum child tax credit limit in 2023 is back at $2,000 from $3,000 and the additional benefit of $600 on top of the $3,000 offered to those whose kids are under the age of 6 has also been withdrawn. The 17-year-old is no longer a qualifying child and the previous age limit of 16 years has been restored.
The lower limit income which made the CTC phased out in two steps is terminated. For 2023 if your income exceeds $200,000 as a single filer (separate filer if married) or $400,000 as a joint filer your CTC will fade away gradually i.e. for every $1,000 income above the threshold you will lose $50 credit.
Finally, there will be no advance payment. However, you may still be able to claim additional child tax credit.
Child Tax Credit vs. Child and Dependent Care Credit
The Childcare tax credit is often confused with child and dependent care credit but the rules for them are different. The CTC is a tax benefit for people with kids under 17 whereas the child and dependent care credit is specifically designed to offset expenses for working parents and caretakers.
One of the eligibility criteria for child and dependent care credit is that you paid expenses for the care of your qualifying dependent while working or actively looking for work.
The qualifying dependent can either be your child under the age of 13 or your spouse who cannot take care of themselves due to physical or mental impairment.
The eligible expenses are the ones that are spent for the protection and well-being of the qualifying dependents.
Who Qualifies (is Eligible) for the Child Tax Credit?
To determine the child tax credit eligibility you need to ask yourself the following 7 questions:
1. How old is the child?
For 2022, the eligible age is under 17. In 2021, the benefit was expanded to include those under 18.
2. How are you related to the child?
The child you are claiming as your dependent must be part of your:
- Biological family - Your child & half-sibling;
- Stepfamily - Stepchild & step-sibling;
- Foster family - Foster child.
Any descendant of one of these (such as a nephew, niece & grandkid) can also be a qualifying child for CTC.
3. What is the level of financial support you provide?
You should be supporting the child and taking care of at least half of his financial needs which means if the child has the means to support half of their financial needs then they are not eligible to be dependent.
4. Does your dependent file a tax return?
As per the IRS:
your dependent must not file a joint return with their spouse for the tax year or file it only to claim a refund of withheld income tax or estimated tax paid.
5. How long is the child living with you?
The qualifying child must reside with you for more than six months.
6. Are you able to claim your child as your dependent on your tax return?
You must be able to claim your child as your dependent to be eligible for the CTC.
7. What is the child’s citizenship status?
To qualify for the CTC the child must have been a:
- US citizen
- US National
- US resident alien
How to Calculate the 2023 Child Tax Credit?
CTC basically is a credit that can initially be used to lower your tax liability. Let’s suppose you have a 13-year-old qualifying son and you are eligible to get $2,000 in child tax credit. Your tax liability for 2023 is $2,500. With CTC you get a dollar-to-dollar reduction for the amount you owe to the tax authority so your liability is reduced to $500.
Consider the second scenario your liability is $1,500 and after using the credit your tax liability becomes nil but you are left with $500 unused credit. Normally you would lose it. But there is a possibility that you can get a check for this unused credit from the IRS if you are eligible for additional child tax credit. You can get up to $1,600 as a refund.
How to Claim the CTC?
Once you determine that you are eligible for CTC benefit you can claim it on your Form 1040. You have to attach Schedule 8812 with your tax return.
You need to have more than $2,500 in earnings, a qualifying child with a social security number, and a Taxpayer identification number which can be Social security number or an individual taxpayer identification number to be able to claim CTC.
If your family income is low and you think, “I don’t need to file a tax return since I don’t owe taxes”, then this can cost you in terms of tax benefits. The child tax credit is one of these benefits if you have kids under the age of 17.
You might also qualify for additional child tax credit which can put some cash in your pocket and help you cover the cost of childcare.
Consequences of a CTC-Related Error!
If you file a claim which was later found to have an error you could face serious ramifications. You will be disallowed to claim CTC for a specified period of time depending on the reason behind the error. If the IRS determines that this error was due to
- Reckless or intentional disregard of the rules you will be disallowed by CTC for 2 years regardless of your eligibility.
- The fraud will be disallowed by CTC for 10 years and the IRS may also impose a penalty on you.
NOTE! Errors are one cause of the IRS audit so any errors in your tax form will raise a red flag and the taxman will come after you. With the help of our tax pro you can avoid making errors and the computation of your tax credit will seem less complex. They will figure out your eligibility criteria and make sure you don’t miss out on any tax benefit.
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Get a free consultation with a tax pro!
Latest History of the CTC
Did you know when the child tax credit started?
In 1997. It has been more than 2 decades ago. It was first introduced to help share the childcare cost with parents and caretakers. In 2017 Tax Cuts and Jobs amended CTC. The changes made are supposed to last till 2025. However, in 2021, it was expanded due to the Covid crisis. Let’s dive into what happened in 2021.
2021 Child Tax Credit
In 2021, when the world was hit with Covid, governments around the globe took initiatives to rescue their citizens and to minimize their suffering. To achieve this, The American Rescue Plan Act made a generous expansion to the child tax credit limit for the tax year 2021.
The children were grouped into 2 categories based on their age and the credit you get depends on which category your child falls into. Under this amendment, your 17-year-old kid also qualifies for this tax break while previously this credit lasted until your child turned 17.
If your children qualify for CTC and they are between ages 6 and 17 the maximum credit for 2021 is $3,000 and if they are below 6 years you could get up to $3,600.
Additionally, to make sure this expanded credit is swiftly available and accessible to more deserving families in times of distress, the IRS made early payments of 50% of the estimated amount of the CTC which you can claim on your 2021 tax return.
If your eligible child is below 18 and over 6 years old you could get up to $250 advance monthly payments in 2021. For children under 6, the maximum limit for advance payment is $350 per month. It doesn’t matter if you earned zero income or your tax liability is Nil.
The credit is fully refundable and most families automatically received these monthly payments prior to their filing. The IRS estimated the amount of advance you received in 2021 based on your preceding tax return.
Overpaying and underpaying is adjusted by reconciling the estimated advanced child tax credit with the actual amount of CTC you claimed in your tax return. If they have underpaid, you can expect to receive an additional amount. In rare cases, if they overpaid you will be liable to pay the excess amount back.
2022 Child Tax Credit
The category under 6 years of age which was created under the America Rescue Plan Act in 2021 no longer exists for the year 2022. Also, your 17-year-old is not a qualifying child. And the maximum credit limit for qualifying children under 17 is set to $2,000.
Everything went back like it was in 2020. In pre covid era and in 2022 the child tax credit is non-refundable which means if you have a credit that exceeds the amount you owe to the tax authority your tax bill will be Nil.
Unlike a tax deduction, the tax credit gives you a dollar-for-dollar reduction to your tax liability. There is no refund for unused credit. You simply lose it.
However, you might be eligible for additional child tax credit which allows you to claim your unused tax credit. You need to complete the worksheet in the IRS Form 8812 to find out whether or not you meet the eligibility criteria for a refundable credit which is capped at $1,600 for 2023.
Child Tax Credit Changes
For 2021, you could claim a CTC up to $3,000 for your kids whose ages fell between 6 to 17 years of age. The maximum credit for your kids under 6 was $3,600. However, this benefit was reduced if you exceeded the specified income limit. For 2021, the income threshold was further lowered and phased out in two steps.
First Phase Out
The modified adjusted gross income threshold for the first phase-out was:
|STATUS||Modified Adjusted Gross Income|
|Single filers or married filing separately||$75,000|
|Married filing jointly or
qualifying widow or widower
|Head of Household||$112,500|
If your MAGI exceeded the threshold then here is how the reduction happened:
- For kids under 6, the maximum reduction in the phase-out was $1,600. This means the credit of $3,600 was reduced to $2,000.
- For kids between the ages of 6 and 17 years, the maximum reduction was $1,000. This means the credit of $3,000 was reduced to $2,000.
Second Phase Out
This second phase-out hits when your modified adjusted gross income exceeds $200,000 for single filers or $400,000 for joint filers. Every increase of $1,000 dollars to your Modified gross adjusted income wipes out $50 CTC. The cycle keeps repeating unless the entire benefit is nil.
As the world began to get well acquainted with Covid, things got back to the way they were. The tax benefit also returned to its previous levels. Advanced payments stopped and the second phase-out is the only one remaining in the current year.
1. Why am I not getting full child tax credit?
The child tax credit 2023 will give you a dollar-to-dollar reduction in your tax liability. For e.g, if your tax liability is $1,400 and you qualify to get a credit of $2,000 in 2023 you will have $600 unused credit. So if you owe less than your CTC you will have unused credit which is non-refundable unless you qualify for additional child tax credit in which case you can get a refund of up to $1,600 for 2023.
2. Will the child tax credit go through 2025?
Yes. Tax Cuts And Job Acts made amendments to CTC which are supposed to last till 2025. However, in 2021 the dramatic turn of events due to covid led to the expansion of CTC where credit amount was increased, and advance payments were made. This was an emergency situation but now the previously established parameters have been restored.