The US government offers parents a handful of tax breaks to offset the cost of raising children. The Child Tax Credit (CTC) is one of them. It’s like a discount on your federal tax bill that can prove hugely beneficial to your household’s bottom line—if you qualify.
Eligibility for the CTC is based on the parent or caregiver’s income and relationship to the child, the child’s age and living situation, and other factors.
Here’s what it could mean for you and your family.
What is the Child Tax Credit?
The Child Tax Credit is a federal support program for Americans who are raising kids. Claiming the credit lowers your tax bill by up to $2,000 per qualifying child under age 17 who is under your care.
So if you owe $2,000 in federal income tax and qualify for a credit worth $2,000, your tax bill could be wiped out.
Good news for big families: There’s no cap on the number of credits you can claim in one year. And the Internal Revenue Service’s (IRS) definition of qualifying child for the CTC is broad enough to include stepchildren, foster children, siblings, grandchildren, nieces, and nephews.
An expanded version of the CTC that included sending advance cash payments to families made waves in 2021, helping to lift millions of Americans out of poverty as the country battled a pandemic and looming economic crisis. In tax years 2022 and beyond, the credit reverted to its original payout rules.
Note: Proposed changes to the CTC related to the bipartisan budget deal currently under way in Congress could expand both the eligibility and the amount of the CTC as well as the amount eligible as a refund. These changes could be effective starting with the 2023 tax year.
How does the Child Tax Credit work?
Most people are familiar with tax deductions. These so-called write-offs allow you to lower your income if you do things like contribute to a retirement plan at work or pay mortgage interest on your home loan. In other words: Put $10,000 into your 401(k), knock $10,000 off your taxable income.
Tax credits like CTC are factored in later, after your tax bill has been calculated—much like a store credit at your favorite retailer. This is one reason why a tax credit can result in greater savings than a deduction; it directly reduces what you owe.
And the Child Tax Credit is one type of credit that can literally put money back in your pocket. If your total credit cancels out your tax bill completely, you could get the remainder—up to $1,600 per qualifying child in 2023—as a refund after filing your tax return.
How much is the Child Tax Credit worth?
The Child Tax Credit is worth up to $2,000 per qualifying child under age 17. Exactly how much you get depends on your income. More specifically, your modified adjusted gross income.
Modified adjusted gross income (MAGI) is a version of your adjusted gross income where certain above-the-line deductions are added back in. The IRS uses slightly different calculations of MAGI to determine eligibility for various tax credits and deductions.
For the CTC, taxpayers with MAGI of up to $200,000—or $400,000 if they file taxes jointly with their spouse—are eligible for the full $2,000 credit per qualifying child. A married couple with 2 young kids and 2023 income under the threshold could get $4,000 knocked off their federal tax bill, for example.
Who qualifies for the Child Tax Credit?
There are 7 general eligibility requirements that determine whether a taxpayer and their dependent qualify for the Child Tax Credit. They are:
- Relationship: The child must be your son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, grandchild, niece, or nephew.
- Age: The child must be under 17 at the end of the year for which you are filing taxes.
- Support: The child must provide no more than half of their own financial support.
- Residency: The child must live with you for more than half of the year.
- Citizenship: The child must be a US citizen, US national, or US resident alien with a Social Security number.
- Dependency status: The child must be claimed as a dependent on your tax return and not file a joint tax return with a spouse (unless it is to claim a refund for tax paid or withheld).
- Income: You must meet the annual income requirements for a full or partial credit.
Child Tax Credit income limit
To get the maximum $2,000 Child Tax Credit, your 2023 MAGI must be under $200,000. If you file taxes jointly with your spouse, your 2023 MAGI should be no more than $400,000.
What are the MAGI phaseout rates?
For every $1,000 that your MAGI exceeds the limit, your credit is reduced by $50.
Here’s a hypothetical example: Let’s suppose a married couple with MAGI of $415,000 and 2 qualifying children claims the Child Tax Credit on their 2023 tax return.
Since their income exceeds the limit to get the full credit, they qualify for a partial credit of $3,250:
$415,000 − $400,000 = $15,000
$15,000 ÷ $1,000 = 15
15 × 50 = $750 reduction to credit
$2,000 × 2 = $4,000 credit
$4,000 − $750 = $3,250
Keep in mind that other credits you claim may have an impact on your ability to claim the full amount of the child tax credit. Consult a tax professional with questions.
Here’s where your MAGI needs to fall to qualify for a full or partial credit:
|Tax filing status
|Full Child Tax Credit
|Single, married filing separately, qualifying widow(er), head of household
|Income under $200,000
|Married, filing jointly
|Income under $400,000
How to claim the Child Tax Credit
You have to file a federal income tax return to claim the Child Tax Credit, even if you think you won’t owe income tax. List your dependents on Form 1040 and complete and attach a form called Schedule 8812 to calculate the value of your credit. You can avoid manually crunching the numbers if you use an online program to do your taxes.
When do you get the Child Tax Credit?
You calculate the value of your Child Tax Credit when you file your taxes, ideally before the April deadline. You’ll be able to apply the value of your CTC and any other credits you qualify for to your tax bill. Note: You can also opt to receive the credit through W-4 adjustments that would reduce withholding taxes each paycheck.
How does the Child Tax Credit work if I don't owe taxes or my taxes are too low?
You don’t need to owe federal income tax to take advantage of the Child Tax Credit. In fact, there’s a special version of the credit, called the Additional Child Tax Credit, that turns your unused credit into a refund—aka cash in your pocket.
What is the Additional Child Tax Credit?
The ACTC is the refundable portion of the Child Tax Credit. If you qualify for the CTC and your tax bill drops to zero before using up all of your credit, you can get up to $1,600 per qualifying child as a refund.
In addition to meeting the basic eligibility requirements for the CTC, your earned income should be at least $2,500. If it’s lower, you won’t be entitled to the refund.
To figure your ACTC, subtract $2,500 from your earned income, then multiply that number by 15% (0.15). Find the smaller of that number or the amount of unused credit you had, and that’s your refund (but remember, the maximum is $1,600 per qualifying child).
A note on timing: While you may have all the documents you need to file your tax return by late January, the IRS cannot legally send out tax refunds that include the ACTC until mid-February. To get yours as soon as possible, be sure to electronically file your return and opt for direct deposit over a mailed check.
What to do with a Child Tax Credit refund
If you qualify for a refund, consider making the most of it by devising a plan for how you’ll use it ahead of time. If you don’t need the funds for immediate expenses, consider putting them toward a larger financial goal. Here are 3 ideas.
- Contribute the savings to a 529 plan or custodial account to give your kids a head start on educational expenses. 529 plans are typically state-sponsored and may allow for state income tax deductions. The federal gift tax may apply for amounts exceeding $18,000 per person and per beneficiary. For 529s only, you can also front-load 5 years' worth of annual gifts of up to $18,000, for a total of up to $90,000 per person, per beneficiary in 2024 without having to pay a gift tax or interfering with the lifetime gift tax exclusion.1
- Use it to bolster your own retirement nest egg by contributing to a Roth IRA. Like a traditional IRA, contribution limits for a Roth IRA in 2023 are $6,500 for those under age 50, and $7,500 for those age 50 or older. The contribution limits for 2024 are $7,000 for those under age 50, and $8,000 for those age 50 or older.
- Add it to your emergency fund to ensure a safety net in the event of job loss or a big, unexpected bill.
Do states have a Child Tax Credit?
Fourteen states offer their own Child Tax Credit to residents.2 In 11 of those states the unused portion of the credit is fully refundable when you file a state tax return.
The federal CTC is more broadly accessible than many of the individual state credits—several states provide the credit only to families with very low income or a disabled child or dependents under age 5, for example. But it’s possible for parents and caretakers to claim both the state and federal credits and wind up with a sizable tax benefit overall.
Good to know: Individuals who don’t qualify for the Child Tax Credit may be able to claim the Credit for Other Dependents (COD). They may also be able to claim this credit in addition to other credits available to them, including the Child Tax Credit if they qualify for it.3 Note: You may be able to claim both credits at the same time for 2 different qualifying individuals, though each qualifying individual can only be claimed for one credit (CTC or COD), not both.
Everyone’s tax situation is different, so remember to consult with a financial professional when considering whether to claim the Child Tax Credit.