Tax breaks are the saving grace of every hard-working American come tax time. However, these credits don’t always translate to money in your pocket. For instance, the Child Tax Credit can lower the taxes you owe, but it won’t create a refund from the government if you wouldn’t otherwise get one. Fortunately, the Additional Child Tax Credit (ACTC) does that job. It takes the unused portion of the Child Tax Credit and turns it into cash. Here’s how the additional child tax credit works and what the limits are.
Whether you’re saving for a financial milestone, or want to lower your tax liability, a financial advisor can help optimize your financial plan.
What Is the Additional Child Tax Credit?
The Additional Child Tax Credit (ACTC) is the refundable portion of the Child Tax Credit. While the Child Tax Credit lowers your tax bill by up to $2,000 per qualifying child, none of that amount is refundable after it pushes your owed taxes to $0. Fortunately, the government provides the ACTC, allowing up to $1,600 per child ($1,700 for tax year 2024) to become a refund when you file taxes. As a result, the ACTC can put thousands of dollars in your wallet even if the Child Tax Credit can’t reduce your taxes below zero.
How the Additional Child Tax Credit Works
The ACTC applies when the Child Tax Credit lowers your owed tax to $0, but there’s money left over from the credit. For example, say you owe $900 in taxes before the credit applies. The Child Tax Credit lowers your taxes to $0, but that leaves $1,100 of the credit unused. This is where the ACTC kicks in, transforming the leftover amount into a refund. As a result, you could receive as much as $1,100 as a tax refund.
Additionally, the amount you receive from the ACTC depends on your income. Specifically, you can receive 15% of your income over $2,500 or the amount of the Child Tax Credit that’s left over, whichever is less. In either case, the ACTC amount maxes out at $1,600 per child.
Filers receive the ACTC for every qualifying child in their household. The IRS defines a qualifying child in the following way:
- Younger than 17 at the end of the tax year.
- Is the filer’s son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, grandchild, niece, or nephew.
- Can be claimed as a dependent by the filer.
- Receives at least half of their support from the filer.
- Lived with the filer for more than half the tax year.
- Is a U.S. citizen, national, or resident alien.
- Has a Social Security number.
- Doesn’t file a joint return with another filer (unless they do so to claim a refund from tax withholdings or estimated tax payments).
Who Is Eligible for the Additional Child Tax Credit?
Eligibility for the ACTC depends on the filer’s work situation and income level. Specifically, the filer must report at least $2,500 in earned income for the tax year from wages, salaries, and self-employment (with some exceptions for disability-related income). Conversely, interest, dividends, pensions, annuities, Social Security checks, unemployment, alimony and child support don’t count toward the qualifying amount. The IRS waives the income minimum requirement for filers with three or more qualifying children.
The ACTC also phases out when filer incomes reach into the hundreds of thousands. Specifically, single filers with modified adjusted gross incomes (MAGI) over $200,000 begin to lose the credit by $50 for every $1,000 or part of $1,000 their income is over the limit. The limit is$400,000 for married couples filing jointly.
Additional Child Tax Credit Example
Here’s an example to demonstrate the ACTC in action: Say a married couple is filing jointly with one qualifying child. Their earned income is $74,500. As a result, their earned income over $2,500 is $72,000. Because 15% x $72,000 = $10,800, the couple would be eligible to receive the full $1,600 from the ACTC. However, the Child Tax Credit lowers their taxes by $1,000 before bringing their owed amount to $0. So, they can claim the unused $600 through the ACTC.
Here’s a second example to show the ACTC’s limits: Say a couple makes $24,500, so their eligible income over $2,500 is $22,000. So, 15% x $22,000 = $3,300. The couple has three children. In this case, although each qualifying child could create a $1,600 refund for a total of $4,800, the 15% rule means the maximum refund from the ACTC will be $3,300.
Child Tax Credit vs. Additional Child Tax Credit
The Child Tax Credit can lower your total tax bill by $2,000 per qualifying child. However, this credit isn’t refundable, so the money doesn’t apply after you owe $0 in taxes. On the other hand, the ACTC provides a tax refund of up to $1,600 per qualifying child. The two credits are connected because the ACTC only kicks in if the filer doesn’t owe taxes. In addition, the Child Tax Credit reduces the ACTC by the amount it took to lower the filer’s taxes to $0.
Bottom Line
The ACTC is a financial benefit for families filing their taxes because it goes beyond the Child Tax Credit’s reach. While the Child Tax Credit reduces the filer’s tax liability per qualifying child, it falls short of offering a refund if it brings the owed taxes to zero. Fortunately, the ACTC ensures that a significant portion—up to $1,600 per child—transforms into a refund, potentially putting thousands of dollars back into the hands of eligible taxpayers.
Tax Planning Tips for Families
- A financial advisor can walk you through smart ways to minimize your taxable income and maximize your refund. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Claiming qualifying depends may not be enough to avoid paying taxes. Fortunately, there are more tax tricks to lower your bill or turn it into a refund.
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