In a NutshellThe child tax credit is a valuable tax break for parents. It’s worth up to $2,000 per qualifying child, and a portion of the credit may be refundable. But you’ll need to meet certain requirements to be eligible.
This article was fact-checked by our editors and CPA Janet Murphy, senior product specialist with Credit Karma. It has been updated for the 2020 tax year.
Having a child might be one of the most exciting, scary, frustrating and rewarding things you’ll ever do — and it’s definitely one of the most expensive.
The U.S. Department of Agriculture says that married middle-income parents of a child born in 2015 will probably spend $284,750 to provide that child with basics like food and shelter until the child is 17. While that amount’s adjusted for inflation, it’s also based on data that’s a few years old. And it doesn’t take into account extras like summer camp, toys and college.
Raising kids isn’t likely to get cheaper, which is why parent-friendly tax benefits like the child tax credit should be on your radar when it’s time to file your federal income tax return.
- Child tax credit basics
- The current child tax credit
- Who can claim the child tax credit?
- Additional dependent credit available
- How tax reform changed the child tax credit
Child tax credit basics
The good news is the federal government helps some parents out with a tax break in the form of the child tax credit.
The child tax credit first became available for the 1998 tax year and started small, initially providing parents just a $400 credit per qualifying child. But the amount of the credit — and the number of families eligible — has grown.
“There’s good news for parents looking to take the child tax credit,” says Michael Sonnenblick, a tax analyst with Checkpoint, a part of Thomson Reuters Tax & Accounting. “Tax reform has doubled the credit, changed the rules on when it is refundable and increased the income limits for taking it.”
But the increase is temporary, disappearing for tax years after Dec. 31, 2025. Let’s look at eligibility under the new rules.
The current child tax credit
The child tax credit provides up to $2,000 in credit for each qualifying child younger than 17 at the end of the tax year. Parents are eligible to claim this tax credit as long as their income isn’t higher than a certain threshold, and as long as they can provide a Social Security number for each child they claim.
Because this is a credit, not a deduction, it provides a dollar-for-dollar reduction in how much tax you owe. Deductions, on the other hand, reduce taxable income, which can reduce the amount of federal tax you owe. For example, if you’d normally owe $8,000 in taxes and are eligible for two $2,000 credits for having two qualifying children, the total tax credit of $4,000 will cut your tax bill down to just $4,000. In comparison, a $4,000 tax deduction could reduce your taxable income, but wouldn’t directly decrease your tax bill by that amount.What's the difference between a tax deduction vs. a tax credit?
The child tax credit is especially helpful for lower-income parents, because it’s partially refundable.
“Credits can either be refundable or nonrefundable,” explains Sonnenblick. “Nonrefundable credits reduce your tax bill, but not below zero. Refundable credits can actually make your taxes owed negative — that is, you will get a tax refund.”
The maximum refundable portion of the child tax credit is $1,400 per qualifying child. So if you’re eligible for the full $2,000 credit for one child, but owe nothing in taxes, the most credit you might be able to get refunded would be $1,400, meaning a portion of the credit would go unclaimed. However, the maximum refund you can receive from the child tax credit is equal to 15% of earned income above $2,500. So if your total tax is zero, but your earned income is more than $2,500, you may not be eligible for the full refund amount.
Who can claim the child tax credit?
If you have a qualifying child, chances are good you’ll be eligible to claim the child tax credit.
“Tax reform made the credit more widely available by drastically increasing the phaseout amounts,” explains Michael Eckstein, an enrolled agent and owner of Eckstein Tax Services in Huntington, New York.
“Previously, the credit started phasing out at $75,000 of modified adjusted gross income, for single filers,” Eckstein says. “Now, it starts phasing out at $200,000 of modified AGI for single taxpayers, and $400,000, for joint filers.”
You don’t have to itemize your deductions to claim the child tax credit, which means you can take the standard deduction and still claim it.
What is the standard deduction for 2020?
For the 2020 tax year, the standard deduction amounts are:
- $12,400 for single filers and married couples filing separately
- $18,650 for head of household filers
- $24,800 for married couples filing jointly and for qualifying widow(er)s
Who counts as a qualifying child?
Parental income isn’t the only factor that determines if you’ll be eligible to claim the child tax credit. Your dependent child also has to qualify.
- The relationship test requires the child be your son or daughter, stepchild, foster child, sibling or step-sibling, or a descendent of one of these relatives, such as a grandchild, niece or nephew
- The abode test requires that the child lived with you for more than half the year
- The dependency test requires you claim the child as a dependent and that you provided at least half the child’s support during the tax year
- And to meet the age requirement, the child must be under 17 years old at the close of the tax year
Additionally, the qualifying child must not have filed a joint return for the tax year (or filed only to claim a refund of income tax withheld or paid), and the child must be a U.S. citizen, national or resident alien. Also, in order for parents to get any refundable portion of the credit they may be eligible for, each qualifying child must have a valid Social Security number.
If a child has divorced parents, only one parent is eligible for the child tax credit under tax law.
“Generally, the custodial parent claims the credit,” Sonnenblick says. “But if the custodial parent has released the dependency exemption, then the noncustodial parent can claim it.”
Additional dependent credit available
Under the Tax Cuts and Jobs Act, there’s also a nonrefundable $500 credit available for dependents who don’t meet the definition of a qualifying child.
“Dependents eligible for the partial credit include ‘qualifying relatives’ for dependency exemption purposes,” Thompson says.
The qualifying relative test is also a multipart test focused on your relationship, gross income and support provided. If you provide half the financial support for a parent or grandparent, stepparent, aunt or uncle, niece or nephew, in-laws, or someone who lives in your home all year long, you may be able to qualify for this $500 credit, as long as the dependent doesn’t earn more than $4,150 (as of 2018).Who can you claim as a dependent?
How tax reform changed the child tax credit
Parents may be surprised to find they might qualify for the child tax credit even if they’ve never been able to qualify for it before. Or they may be surprised to find the credit is larger than anticipated. The reason for this windfall? Tax reform.
“Prior to the Tax Cuts and Jobs Act, the credit was only $1,000 (per qualifying child),” Sonnenblick says.
And no amount of the child tax credit wasn’t refundable before. Parents could claim an additional child tax credit that was partially refundable — but the rules for claiming it were complicated. Tax reform essentially combined these two credits into one tax break, which made a portion of the child tax credit refundable.
“The income limits have also been expanded,” Thompson says.
In fact, the credit phased out starting at $110,000 for joint filers, $55,000 if you filed as married filing separately, and $75,000 for other filing statuses under the old rules.
“The distinction for married filing separately no longer exists,” Thompson says.
But, the expansion comes with a deadline.
“The Tax Cuts and Jobs Act change will sunset Dec. 31, 2025, and the child tax credit will revert to $1,000 after that year,” Sonnenblick notes.
Higher income limits and other changes also expire in 2025. This means you should take advantage of the higher tax credit now if you qualify, because you may only have a few years to reap big tax savings.
Of course, that expiration date is based on current law. Congress can act to change that law — if it chooses — by extending the expiration date, making the credit permanent or doing away with it altogether.
In the lengthy analysis that accompanies the Tax Cuts and Jobs Act (see the full document here), the government projects that the changes to the child tax credit will affect about 90 million tax returns.
Lower income thresholds will likely mean that people whose income made them ineligible for the credit in previous tax years might be eligible for it this year. But you still need to meet certain requirements in order to qualify to claim the $2,000 tax credit.
A senior product specialist with Credit Karma, Janet Murphy is a CPA with more than a decade in the tax industry. She’s worked as a tax analyst, tax product development manager and tax accountant. She has accounting degrees and certifications from Clemson University and the U.S. Career Institute. You can find her on LinkedIn.