What’s the Additional Child Tax Credit and How Does It Work?

Tax credits can significantly reduce the amount of tax owed, and some even provide refunds beyond what a taxpayer owes. The Additional Child Tax Credit (ACTC) helps families with lower taxable income receive financial relief. Unlike the standard Child Tax Credit, which offsets taxes owed, the ACTC allows eligible taxpayers to claim a refund if their credit exceeds their tax liability.

Key Requirements

To qualify for the ACTC, taxpayers must meet specific conditions related to the child being claimed, income level, and filing status. Compliance with these factors is essential to receive the refundable portion of the credit.

Child-Related Conditions

The child must meet the criteria outlined in IRS Publication 972. They must be under 17 at the end of the tax year and have a valid Social Security number issued before the tax return deadline. Eligible dependents include sons, daughters, stepchildren, legally adopted children, and, in some cases, grandchildren or siblings who meet dependency criteria.

The child must have lived with the taxpayer for more than half the year, except in certain situations like military deployment or divorce agreements. Additionally, they cannot provide more than half of their own financial support during the year. If multiple taxpayers claim the same child, IRS tie-breaker rules determine eligibility.

Taxpayer Income Threshold

The ACTC is intended for low- to moderate-income households and is based on earned income, which includes wages, salaries, tips, and self-employment earnings. For the 2023 tax year, taxpayers must have at least $2,500 in earned income to qualify for the refundable portion.

Once this threshold is met, the refundable amount is generally 15% of earned income above $2,500, up to a maximum of $1,600 per child. For example, if a taxpayer earns $15,000, the refundable portion is calculated as ($15,000 – $2,500) × 15% = $1,875. However, the refund cannot exceed the maximum ACTC amount per child. Those who fail to meet the minimum earned income level are ineligible for the refund.

Filing Status Considerations

Filing status affects ACTC eligibility. Taxpayers filing as Single, Head of Household, Married Filing Jointly, or Qualifying Widow(er) can claim the credit, while those using Married Filing Separately may face restrictions.

The IRS enforces phase-out limits based on adjusted gross income (AGI), starting at $200,000 for single filers and $400,000 for married couples filing jointly. The credit is reduced by $50 for every $1,000 over these thresholds. This reduction applies before determining the refundable portion, meaning higher-income earners may not qualify for any ACTC refund. Reviewing AGI and filing status helps taxpayers avoid errors.

Refundability Factor

The ACTC provides a refund even if little to no federal income tax is owed, benefiting lower-income families who may not fully use the standard Child Tax Credit. Instead of losing the unused portion, the ACTC offers a cash refund based on earnings.

The refundable amount depends on earned income and is capped per qualifying child. Families with higher earnings within the eligibility range receive a proportionally larger refund, while those with minimal earnings may receive a reduced or no refund if they do not meet the income threshold.

Refunds including the ACTC are delayed until mid-February under the Protecting Americans from Tax Hikes (PATH) Act to prevent fraudulent claims and ensure compliance.

Filing Instructions

To claim the ACTC, taxpayers must complete Schedule 8812, which calculates both the standard Child Tax Credit and any refundable portion. This form requires details on qualifying children, total earned income, and other credits that may affect the calculation. It must be attached to Form 1040 or 1040-SR before submission.

Electronic filing is the fastest way to submit tax returns that include the ACTC, reducing errors and expediting refunds. IRS Free File and commercial tax software automatically calculate eligibility and credit amounts, minimizing miscalculations. Those using professional tax preparers should ensure they are knowledgeable about refundable credits to avoid delays.

For faster refunds, direct deposit is recommended. The IRS allows taxpayers to split refunds across multiple bank accounts, which can help with budgeting. Individuals without traditional bank accounts may consider prepaid debit cards or mobile banking solutions that accept direct deposits. Ensuring bank details are correct at the time of filing prevents delays caused by rejected deposits.

Potential Errors to Avoid

A common mistake when claiming the ACTC is failing to reconcile prior-year tax liabilities with credits already received. Taxpayers who previously claimed the ACTC but had income or filing status changes may misreport eligibility. The IRS cross-checks prior filings, and discrepancies can lead to audits or delayed refunds. Keeping records of past returns and IRS notices helps prevent these issues.

Another frequent error is misreporting earned income, particularly for self-employed individuals. Since ACTC calculations rely on earnings, inaccuracies in reported wages or business income can result in incorrect credit amounts. Self-employed taxpayers should ensure their income is correctly documented using IRS-approved methods, such as Schedule C for sole proprietors or Form 1099-NEC for contract work. Underreporting income to maximize the ACTC can trigger IRS scrutiny, leading to penalties or disqualification from claiming the credit in future years.