How Is the Child Tax Credit Calculated?

The Child Tax Credit (CTC) provides a tax benefit for families with qualifying children. While the full Child Tax Credit is a non-refundable credit, meaning it can reduce a tax liability to zero but not result in a refund beyond that, a portion of it can be refundable through the Additional Child Tax Credit.

Basic Calculation of the Child Tax Credit

For the 2024 tax year, the credit can be worth up to $2,000 for each qualifying child. To be considered a qualifying child for this credit, an individual must be under the age of 17 at the end of the tax year. The child must also be claimed as a dependent on the taxpayer’s return and have a valid Social Security number issued for employment. Furthermore, the child must be related to the taxpayer in specific ways, such as a son, daughter, stepchild, foster child, sibling, or a descendant of these, and must have lived with the taxpayer for more than half of the tax year. The child must not have provided more than half of their own financial support for the year.

The initial calculation of the Child Tax Credit involves multiplying the number of qualifying children by the maximum credit amount. For instance, if a family has two qualifying children, the potential credit would initially be $4,000 (two children multiplied by $2,000 per child). This figure represents the credit before any income-based adjustments are considered.

Income Adjustments to the Credit

A taxpayer’s Modified Adjusted Gross Income (MAGI) determines the final Child Tax Credit amount. The credit begins to decrease for taxpayers whose MAGI exceeds certain thresholds.

For the 2024 tax year, the Child Tax Credit starts to phase out if a taxpayer’s MAGI surpasses $200,000 for single filers, heads of household, or qualifying widow(er)s. For those married filing jointly, the phase-out begins at a MAGI of $400,000. Married individuals filing separately also see a phase-out starting at $200,000.

The credit amount is reduced by $50 for every $1,000, or fraction thereof, by which the MAGI exceeds these thresholds. For example, if a married couple filing jointly has a MAGI of $401,000, their credit would be reduced by $50 because their income exceeds the $400,000 threshold by $1,000. If their income was $401,500, the credit would still be reduced by $100, as any fraction of $1,000 rounds up to the next full $1,000 for the reduction calculation. This reduction continues until the non-refundable portion of the Child Tax Credit is completely eliminated.

Understanding the Additional Child Tax Credit

Beyond the non-refundable Child Tax Credit, a refundable component known as the Additional Child Tax Credit (ACTC) can provide further financial relief. The ACTC allows eligible taxpayers to receive a portion of the credit as a refund, even if they owe no income tax.

For the 2024 tax year, the maximum refundable amount for the ACTC is up to $1,700 per qualifying child. To qualify for the ACTC, a taxpayer must have earned income exceeding $2,500. Earned income includes wages, salaries, tips, and net earnings from self-employment.

The ACTC is calculated as 15% of the earned income that exceeds the $2,500 threshold. For instance, if a taxpayer has $12,500 in earned income, the calculation would involve taking 15% of the income above $2,500, which is $10,000 ($12,500 – $2,500). This would result in a potential ACTC of $1,500 ($10,000 x 0.15), assuming this amount does not exceed the per-child maximum of $1,700. The final ACTC amount is the lesser of the remaining Child Tax Credit after reducing the tax liability to zero, or the calculated 15% of earned income above the threshold, up to the maximum refundable amount per child.

Information Needed to Calculate Your Credit

To accurately calculate the Child Tax Credit and the Additional Child Tax Credit, taxpayers need to gather several specific pieces of information.

Information includes the Social Security numbers for all qualifying children. Your Adjusted Gross Income (AGI) from your tax return, or an estimated AGI if planning in advance, is also necessary to determine if income phase-outs apply. Your filing status, such as single, married filing jointly, or head of household, directly impacts the income thresholds for the credit.

Your total earned income for the tax year will be required if you anticipate qualifying for the Additional Child Tax Credit. Information related to the qualifying child criteria, such as each child’s age at the end of the tax year, how long they resided with you, and whether they provided more than half of their own support, is also needed. These details can be found on documents like Form W-2 for earned income, and your prior year’s Form 1040 for AGI.