How Do Child Tax Credit Payments Work?
Understand the tax system behind the Child Tax Credit. This guide clarifies the process for claiming this federal benefit and how it relates to state programs.
The Child Tax Credit is a federal tax benefit designed to assist families with the financial costs of raising children. It directly reduces the amount of income tax a household owes, providing financial relief to eligible taxpayers.
Determining Your Eligibility
To qualify for the Child Tax Credit (CTC), you and your child must meet several specific criteria established by the Internal Revenue Service (IRS). A child is considered a “qualifying child” if they pass seven distinct tests.
- Age: The child must have been under the age of 17 at the end of the tax year.
- Relationship: The child must be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of these individuals, such as a grandchild, niece, or nephew.
- Support: The child could not have provided more than half of their own financial support during the year.
- Dependent Status: You must claim the child as a dependent on your tax return.
- Citizenship: The child must be a U.S. citizen, U.S. national, or U.S. resident alien.
- Residency: The child must have lived with you for more than half of the tax year.
- Joint Return: This test prevents you from claiming the credit if the child files a joint tax return for the year, unless it was filed only to claim a refund of withheld income tax or estimated tax paid.
Beyond the child-specific tests, your own financial standing is a factor. Your eligibility is subject to income limitations based on your Modified Adjusted Gross Income (MAGI). For the 2024 tax year, the credit begins to phase out for taxpayers with a MAGI above $400,000 on a joint return or above $200,000 for all other filing statuses. A requirement for claiming the CTC is that the child must have a Social Security Number (SSN) that is valid for employment and issued before the due date of your tax return.
Calculating the Credit Amount
The maximum credit amount is currently set at $2,000 per qualifying child. This figure serves as the starting point for the calculation, which is then adjusted based on your income level. The credit is reduced by $50 for each $1,000 (or fraction thereof) that your MAGI exceeds the applicable threshold mentioned previously. This reduction continues until the credit is completely phased out.
A feature of the Child Tax Credit is its partial refundability through the Additional Child Tax Credit (ACTC). A refundable credit means you can receive money back as a refund even if you do not owe any income tax. For the 2024 tax year, up to $1,700 of the CTC per child is refundable. The ACTC is calculated based on your earned income by taking 15% of your earned income that exceeds $2,500, up to the maximum refundable amount per child.
How to Claim the Child Tax Credit
The process of claiming the Child Tax Credit involves your annual federal income tax return. You must file a Form 1040, U.S. Individual Income Tax Return, to receive the credit, even if your income is low enough that you would not otherwise be required to file.
To calculate and claim the credit, you will need to complete and attach Schedule 8812, Credits for Qualifying Children and Other Dependents, to your Form 1040. This form walks you through the calculations for both the nonrefundable and refundable portions of the Child Tax Credit. It separates the amount that reduces your tax liability from the amount you can receive as the Additional Child Tax Credit.
After completing Schedule 8812, the calculated credit amount is transferred to your Form 1040. The nonrefundable portion of the credit is applied first, reducing your tax liability dollar-for-dollar. If the credit is larger than your tax liability, the refundable portion, or ACTC, is then added to your tax refund. You can receive this refund through direct deposit into a bank account or as a paper check mailed to your address.
Understanding Advance Payments and Reconciliation
In 2021, the American Rescue Plan Act temporarily altered the Child Tax Credit, allowing half of the credit to be issued as advance monthly payments. This was a one-time change, and the advance payment system is no longer active. Taxpayers who received these payments in 2021 had to reconcile the amount received with the total credit they were eligible for on their tax return for that year. The Child Tax Credit has since reverted to being claimed as a single lump sum on an annual tax return.
State-Level Child Tax Credits
In addition to the federal Child Tax Credit, a growing number of states have implemented their own child tax credits to provide further financial support to families. These state-level credits are separate from and in addition to the federal credit.
The eligibility rules, credit amounts, and refundability of these state credits vary widely. Some states may tie their eligibility requirements closely to the federal rules, while others establish entirely different income thresholds or definitions of a qualifying child. The value of these credits can range from a few hundred dollars to over a thousand dollars per child.
Because the rules are state-specific and can change, taxpayers should consult their own state’s department of revenue or taxation. These agencies provide the official forms, instructions, and eligibility guidelines needed to claim a state-level child tax credit.