What is the child tax credit?

Raising children can be especially rewarding in many ways. And at tax time, these rewards may include some extra money in your pocket. The child tax credit is a way to reduce your income taxes if you have dependents under age 17.

Unlike a deduction, which lowers the amount of income you're taxed on, a tax credit cuts your tax bill by a set amount. You can take the child tax credit for each of your eligible dependents.

Keep in mind that the child tax credit is nonrefundable. If it exceeds your tax bill, you pay zero dollars, but you don't receive the unused portion of the credit. However, you may then be eligible for an additional child tax credit, which could provide a refund after all.

For 2023 through 2025, the child tax credit can cut your taxes annually by up to $2,000 per child. That's the same amount that was available for 2022 and less than the amount offered in 2021 during a one-year expansion enacted as part of the American Rescue Plan to ease hardships associated with the COVID-19 pandemic.

You can claim the full child tax credit for each qualifying child if your annual income is no more than $200,000, or $400,000 if you file jointly with your spouse. If your income is higher, you might still qualify for a partial credit.

For you to be eligible, each child you claim the credit for must:

• Be your child, stepchild, foster child, sibling, step-sibling, half-sibling or a descendant of someone who fits one of those descriptions.
• Be under the age of 17 at the end of the tax year.
• Live with you for more than half the year.
• Be properly claimed as your dependent on your tax return.
• Not provide more than half of their own financial support during the year.
• Not file a joint tax return with anyone except to receive a refund of withheld income or overpaid estimated taxes.
• Be a U.S. citizen, U.S. national or U.S. resident alien.
• Have a Social Security number valid for U.S. employment.

To claim the child tax credit, name your dependents on your Form 1040, U.S. Individual Income Tax Return, and complete a Schedule 8812, Credits for Qualifying Children and Other Dependents. You can find the forms you need and further information on the IRS.gov website.

If you're divorced, only one of your child's parents or guardians can claim the child tax credit. Typically, it's the custodial parent who the child lived with for the greater number of nights during the year. However, if the custodial parent files Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, the noncustodial parent can claim the child tax credit instead.

If you're eligible for the child tax credit but your tax bill is low enough to keep you from using the maximum $2,000 per child, you may be eligible for an additional child tax credit.

Essentially, the additional child tax credit is a refundable portion of your child tax credit. It allows you to receive some or all of the child tax credit amount you couldn't use because it exceeded your overall tax bill. On 2023 tax returns, the additional child tax credit can provide refunds up to $1,600 per child. For 2024, that amount rises to $1,700.

To see how this works using the current approved figures, let's say you have three children and owe $10,000 in taxes during 2023. The child tax credit would reduce your tax liability to $4,000, which is $10,000 minus $2,000 per child. However, if your tax bill was $1,000, the child tax credit would only lower it to zero.

That's where the additional child tax credit comes in. Out of the $6,000 child tax credit you were eligible for, you used $1,000 to reduce your tax bill to zero. The remaining $5,000 went unused. Claiming the additional child tax credit allows you to receive a portion of that unused amount as a refund—$1,600 per child, totaling $4,800 for all three.

Sure, raising kids can sometimes be "taxing," but it can also entitle you to tax breaks, courtesy of the child tax credit and additional child tax credit. Depending on your income and other aspects of your finances, you might qualify for other tax credits, too.

Want to craft a financial strategy that puts tax efficiency front and center? A Thrivent financial advisor can help.