What Is the Additional Child Tax Credit?

The Additional Child Tax Credit was the refundable portion of the Child Tax Credit. It could be claimed by families who owed the IRS less than their qualified Child Tax Credit amount. Since the Child Tax Credit was non-refundable, the Additional Child Tax Credit refunded the unused portion of the Child Tax Credit to the taxpayer. This provision was eliminated from 2018 to 2025 by the Tax Cuts and Jobs Act (TCJA).

However, under the TCJA, the Child Tax Credit includes some provisions for refundable credits.  In addition, if signed into law, President Biden’s American Rescue Plan would make credits fully refundable in 2021.

Key Takeaways

  • The Additional Child Tax Credit was the refundable portion of the Child Tax Credit.
  • It could be claimed by families who owed the IRS less than their qualified Child Tax Credit amount.
  • The Additional Child Tax Credit was eliminated from 2018 to 2025 by the Tax Cuts and Jobs Act, but the current form of the Child Tax Credit includes provisions for refundable credits.
  • President Biden’s American Rescue Plan would make credits fully refundable in 2021.
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Tax Deductions Vs. Tax Credits

Understanding the 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. 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 Susan'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, they may be eligible to claim a tax credit. For example, taxpayers with children may qualify for the Child Tax Credit which helps to offset the costs of raising kids.

For the 2020 tax year, the Child Tax Credit allows an eligible tax filer to reduce their tax liability by up to $2,000 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 U.S. 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 their own financial support
  • Have a Social Security number 

Previously, the Child Tax Credit was non-refundable, which means that the credit could reduce a taxpayer’s bill to zero, but any excess from the credit would not be refunded. Families who wanted to keep the unused portion of the Child Tax Credit were able to go the route of another available tax credit called the Additional Child Tax Credit. The Additional Child Tax Credit was a refundable tax credit that families could qualify for if they already qualified for the non-refundable Child Tax Credit. The Additional Child Tax Credit was ideal for families who owed less than the Child Tax Credit and wanted to receive a refund for the surplus credit.

While the Additional Child Tax Credit was eliminated in 2018 under the Tax Cuts and Jobs Act (TCJA), up to $1,400 of the $2,000 Child Tax Credit can be refundable for each qualifying child if certain conditions are met. For example, in order to qualify for any refund, a taxpayer needs to earn more than $2,500 for the tax year. To make a claim for a refund, filers must complete Schedule 8812.

President Biden’s stimulus plan is proposing major changes to the Child Tax Credit for 2021. The maximum credit would rise to $3,000 (children up to 17) or $3,600 (children younger than six). Qualifying families would start receiving monthly checks based on their 2020 income in July 2021. The credit would also become fully refundable in 2021. Benefits would phase out for individual filers earning more than $75,000 and joint filers earning more than $150,000.

Example of the Additional Child Tax Credit

Prior to the TCJA, the IRS allowed families with an annual income of more than $3,000 to claim a refund using the Additional Child Tax Credit. The tax credit depended on how much the taxpayer earned and was calculated by taking 15% of the taxpayer's taxable earned income over $3,000 up to the maximum amount of the credit, which was then $1,000 per child. The total amount in excess of $3,000 (subject to annual adjustments for inflation) was refundable.

For example, a taxpayer with two dependents qualifies for the Child Tax Credit. Their earned income is $28,000, which means 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, they would have received the full portion of any unused credit. So, if the taxpayer received a $800 Child Tax Credit, they would be refunded a $1,200 Additional Child Tax Credit. However, if the taxable earned income was $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 earned income that is above $3,000, the taxpayer would receive a maximum refund of $1,350, not $2,000.

Taxpayers with income below $3,000 were eligible if they had at least three qualifying dependents and paid Social Security Tax in excess of the amount of their earned-income credit for the year.