Additional Child Tax Credit

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What is the 'Additional Child Tax Credit'

The Additional Child Tax Credit is the refundable portion of the Child Tax Credit that can be claimed by families who owe the IRS less than their qualified Child Tax Credit amount. Since the Child Tax Credit is non-refundable, the Additional Child Tax Credit refunds the unused portion of the Child Tax Credit to the tax payer.

BREAKING DOWN 'Additional Child Tax Credit'

A tax credit is a benefit given to eligible taxpayers to help reduce their tax liabilities. If Susan’s tax bill is $5,550 but she qualifies for a $2,500 tax credit, she will only have to pay $5,550 - $2,500 = $3,050 to the government. Some tax credits are refundable, meaning that if the tax credit amounts to more than what is owed as tax, the individual will receive a refund. If Susie’s tax credit is actually $6,050 and is refundable, she will be given a check for $6,050 - $5,550 = $500. Depending on what tax group a taxpayer falls in, s/he may be eligible to claim a tax credit catered to that group. For example, taxpayers with children may qualify for the Child Tax Credit which helps to offset the costs of raising kids.

The Child Tax Credit allows an eligible tax filer to reduce his tax liability by up to $1,000 per child. To be eligible for the Child Tax Credit, the child or dependent must:

  • be 16 years or younger by the end of the tax year;
  • be a US citizen, national, or resident alien;
  • have lived with the taxpayer for more than half of the tax year.
  • be claimed as a dependent on the federal tax return
  • not have provided more than half of his or her own financial support

The Child Tax Credit is non-refundable, which means that the credit can reduce a taxpayer’s bill to zero, and any excess from the credit will not be refunded. An individual who owes $800 to the government but claims $2,000 child tax credit for her two kids will eventually have to pay nothing but the surplus $1,200 will be lost.

Families who would like to keep the unused portion of the child tax credit can go the route of another available tax credit called the Additional Child Tax Credit. The Additional Child Tax Credit is a refundable tax credit that families may qualify for if they already qualify for the non-refundable Child Tax Credit. The Additional Child Tax Credit is ideal for families who owe less than the Child Tax Credit and would like a refund for the surplus credit.

Schedule 8812 of Form 1040 is used to find out if a person qualifies for the Additional Tax Credit and how much the individual qualifies for. The Internal Revenue Service (IRS) allows families with annual income of more than $3,000 and with three or more qualified children to claim a refund using the Additional Child Tax Credit. The tax credit depends on how much the taxpayer earns and is calculated by taking 15% of the taxpayer's taxable earned income over $3,000 up to the maximum amount of the credit, which is $1,000 per child. The total amount in excess of $3,000 (subject to annual adjustments for inflation) is refundable.

For example, a taxpayer with two dependents qualifies for the Child Tax Credit. His earned income is $28,000, therefore, his income over $3,000 is $25,000. Since 15% x $25,000 = $3,750 is greater than the maximum credit of $2,000 for two kids, he’ll receive the full portion of any unused credit. So, if he received $800 Child Tax Credit, he will be refunded $1,200 Additional Child Tax Credit. However, if his taxable earned income is $12,000 instead, 15% of this amount over $3,000 is 15% x $9,000 = $1,350. Because the refundable portion of the credit cannot exceed 15% of his earned income that is above $3,000, he would receive a maximum refund of $1,350 not $2,000.

Taxpayers with income below $3,000 may be eligible if they have at least three qualifying dependents and have paid Social Security Tax in excess of the amount of their earned-income credit for the year. This credit is claimed on Schedule 8812 and is also subject to the same phaseout limitations as the child tax credit.