Additional Child Tax Credit (ACTC): Definition & Meaning

KEY TAKEAWAYS

• The refundable element of the child tax credit is the enhanced child tax credit.
• Families who owe the IRS less than the amount of the qualified child tax credit are eligible to apply for it.
• The Tax Cuts and Jobs Act increased the amount of the CTC to $2,000 but limited the refundable portion of the credit to $1,400.  Child tax credits for 2021 were fully refundable as part of the American Rescue Plan.
• Some qualified taxpayers could elect to receive monthly advance child tax credit payments in 2021. These totaled half of their total child tax credit. Those who qualified claimed the second half on their 2021 joint returns or their individual returns. 

What Is Additional Child Tax Credit?

The additional child tax credit is a percentage of the child tax credit that is refundable. Families who owe the IRS less than the amount of the qualified child tax credit are eligible to apply for it. The supplementary child tax credit reimburses the taxpayer for the unused amount of the child tax credit because the main child tax credit is non-refundable.

For 2022, the amount of CTC that can be claimed as refundable increased to $1,500 (adjusted for inflation).

The Tax Cuts and Jobs Act increased the maximum value of the CTC to $2,000 per child but limited the refundable portion to $1,400 per child (TCJA).

The refundable tax credit provisions for the child tax credit are included in the TCJA, though.

Additionally, President Biden’s American Rescue Act was passed into law on March 11, 2021, making child tax credits completely refundable in that year.

How Much Is the Additional Child Tax Credit?

The child tax credit enables eligible tax filers to lower their tax obligation by up to $2,000 per child for the tax years 2022 through 2025. The additional child credit (ACTC) is the refundable portion of the credit and, for 2022, increased to $1,500 per child.

You are eligible for the full amount of the credit for each child if your annual income doesn’t exceed $200,000 ($400,000 for married filing jointly).

In order to qualify for the child tax credit, the qualifying child or dependent must: 

• Be your child, stepchild, eligible foster child, sibling, half sibling, or descendant of one of these (nephew, grandchild)
• Be under 17 years of age  at the end of the tax year
• Be a U.S. resident alien, U.S. citizen, or U.S. national
• Have lived with the taxpayer  for more than half the tax year
• Be listed as a dependent on the taxpayer federal tax return
• Have a valid Social Security number for employment
• Not file a joint return with their spouse or file it only to claim a refund of withheld income tax or estimated tax payments
• Not contributed more than half of their of own financial support during the year 

How Does Additional Child Tax Credit Work?

A tax credit is a benefit provided to qualified taxpayers to assist in lowering their tax obligations. The tax bracket a taxpayer is in will determine whether they are qualified to receive a tax credit. Taxpayers with children may be eligible for the child tax credit, which helps cover the expense of raising children.

The child tax credit is claimed on Schedule 8812 (Form 1040). 

How to Calculate the Additional Child Tax Credit

Prior to the TCJA, the IRS permitted families with an annual income of over $3,000 to use the additional child tax credit to request a refund. The tax credit was determined by deducting 15% of the taxpayer’s taxable earned income over $3,000 up to the maximum credit, which was then $1,000 per child. 

The credit was dependent on the taxpayer’s earnings and any amount that exceeded $3,000 was refundable. ACTC is subject to annual adjustments for inflation.

For 2022, you may receive the refundable additional child tax credit if your Child Tax Credit (CTC) is greater than the total amount of income taxes you owe. 

How Do I Qualify for the Additional Child Tax Credit?

Working parents with low to moderate incomes are supposed to benefit from both the Child Tax Credit and the Additional Child Tax Credit. Families cannot claim the ACTC unless they have earned an income of at least $2,500. 

Salaries and wages, self-employment, and some disability payments are all examples of earned income. Parents who only receive “unearned” income, such as interest, dividends, pensions, annuities, social security, unemployment benefits, alimony, or child support, are ineligible for the refundable portion of the credit.

What Are the Benefits of Additional Child Tax Credit?

There are a number of benefits of the additional child tax credit. Some of these benefits include: 

• According to the Tax Policy Center, 92 percent of households with children will receive a CTC with an average value of $4,380.
• Because families can have more than one child, the average credit can be higher than the maximum credit per child.
• 89 percent of families with children received an average CTC of $2,310 under the previous law.
• Average credits were reduced for all income levels, but especially for the families with the lowest incomes.

Additional Child Tax Credit Example

Prior to TCJA, a taxpayer who has two qualifying dependents, for instance, would be  eligible for the child tax credit. They have $28,000 in earned income, $25,000 over the required income of $3,000. They would have gotten the full share of any unused credit because 15% x $25,000 = $3,750 is larger than the $2,000 credit cap for two children.

Thus, the taxpayer would receive a refund of $1,200 Additional Child Tax Credit if they had previously received an $800 Child Tax Credit. However, if the taxable earned income had been $12,000 as opposed to $3,000, the excess would be 15% x $9,000, or $1,350. The taxpayer would only be eligible for a maximum refund of $1,350, not $2,000, as the refundable element of the credit is limited to 15% of earned income over $3,000 and cannot exceed that amount.

For 2022, a taxpayer has an AGI of $28,000 with two qualifying children, filing as a head of household (HOH). The taxpayer will qualify for the full amount of CTC of $4,000 ($2,000 per child), and $1,500 of the credit is refundable (will reduce the tax liability dollar-for-dollar and any remaining amount will be refunded).

Summary

The American Rescue Plan for 2021 increased the Child Tax Credit (CTC) 

The credit is entirely refundable. This means that low-income families across the country were entitled to the maximum amount regardless of their income. If the credit was greater than the amount of taxes owed, families may get a tax refund.

Written by Sandra Habiger, CPA

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.

Written by Sandra Habiger, CPA

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.