Recently, the Democrats passed a bill called the American Rescue Plan Act, that made some changes and updates to the child tax credit. This was quickly spun as either a middle-class tax cut or raising taxes on the poor. It’s weird to see how people can distort what is really happening in order to fit their own agenda. The Child Tax Credit is $3,000 per child between 6 and 17 years old. The Child Tax Credit is $3,600 for each child under 6 years old.
Child Tax Credit Basics
The child tax credit is a credit. This is different than a tax deduction. A deduction is something that reduces your taxable income. The actual amount you save on your taxes then is a fraction of the amount deducted. For example, if you made $80,000 and you get $20,000 in deductions, then you pay taxes only on $60,000 in income, which means you get only a percentage of that $20,000 in deductions.
A credit, on the other hand, is a reduction not in your income, but in your actual tax. So, a $1,000 tax credit means you actually pay $1,000 less in taxes. A credit is much better than a deduction for the same amount.
Child Tax Credit Nuance
The thing that makes this discussion weird is that a tax credit is typically supposed to reduce the amount of taxes you pay, dollar for dollar. So, if you owe $5,000 in taxes and you have a $1,000 child tax credit, then you only pay $4,000 in taxes.
So far, so good.
But what if you only owe $600 in taxes? If you have a qualifying child, you qualify for a $1,000 tax credit. Except you don’t owe $1,000, so normally in tax law, you owe $0. You don’t usually get a credit on something you didn’t pay in the first place.
If you go to the grocery store with a $10 off purchase coupon, but you buy something that costs $2, they only give it to you for free. They don’t give you an extra $8 back. The child tax credit, however, does work just like that. It specifically allows people to claim a full credit even if they owe no taxes, so long as they meet a minimum income limit. This is called a refundable tax credit because they will refund the part that you didn’t use directly to you.
You can make too much money to qualify for the child tax credit. The limit at which the child tax credit phases out for married taxpayers starting at $150,000 for married taxpayers, and $112,500 for head of household, and $75,000 for single or married filing separately. If you make too much money, you don’t get to claim the child tax credit. A lot of the tax code works this way. There are income limits to contribute to a Roth IRA or make a deductible IRA contribution as well for example.
Money from the Child Tax Credit does not count against qualifying for other government benefits. You are required to file income taxes in order to get the Child Tax Credit though. There are a whole slew of rules for determining who counts as a person’s child in order to get the tax credit. The government has a website here to help you figure it out.
Childcare Tax Credit
Do not confuse the Child Tax Credit with the Child and Dependent Care Credit. The Child and Dependent Care Credit offsets the costs of providing childcare like day care or other paid arrangements for childcare. The credit is good for up to 50% of your care-related expenses if your adjusted gross income is below $125,000. The credit phases out for those with an AGI above that before dropping to zero for those with an AGI above $438,000.
The maximum credit is $16,000 for two or more children, and $8,000 for one child.
By Brian Nelson – Brian is a former Certified Financial Planner and financial advisor. He writes for the Finance Gourmet and other financial publications. The material provided on this website is for informational use only and is not intended for financial or tax advice. ArcticLlama, LLC, FinanceGourmet.com, and Brian Nelson assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please note that material may not be updated regularly and that some of the information may not be current. Consult with your own tax professional when making decisions regarding your tax situation.