8566 / When is a taxpayer entitled to claim the child tax credit?

Editor’s Note: The ARPA expanded and enhanced the child tax credit for the 2021 tax year. For tax years beginning after December 31, 2021 and before January 1, 2022, the child tax credit amount increased from $2,000 to $3,000 per qualifying child. The credit amount was also fully refundable for the 2021 tax year only (under TCJA, $1,400 was refundable, see below). The $3,000 amount was also increased to $3,600 per qualifying child who was under the age of six years old as of December 31, 2021. Seventeen-year-olds were treated as qualifying children in 2021.

Eligible taxpayers were not required to take any action to receive the advance payments on the 15th of every month. Monthly payments totaled up to $300 for each child under age six and up to $250 per month for each child aged six and older. Depending upon the information the IRS had on file, payments were made via direct deposit, paper checks or debit cards. The advance payments totaled up to 50 percent of the amount the taxpayer was eligible to receive based on 2020 filing information. According to IRS guidance, taxpayers who were not otherwise required to file tax returns for 2020 could file simplified 2020 returns to receive monthly advance payments. Those taxpayers filed Form 1040, Form 1040-SR or Form 1040-NR to provide Social Security numbers, addresses and other information, writing “Rev. Proc. 2021-24” on the forms. Taxpayers who had $0 in adjusted gross income (AGI) reported $1 in AGI in order to file electronically and qualify for advance payments.¹ As of the date of this publication, the advance payment system has not been extended for 2022 and beyond.

The 2017 tax reform legislation eliminated the personal exemption (and the dependency exemption) and expanded the previously available child tax credit. Under the Act, the child tax credit is increased to $2,000 (from $1,000) per child under age 17; $1,400 of this per-child credit is refundable. The taxpayer must include the Social Security number for each child for which the refundable portion of the child tax credit is claimed.² The $1,400 refundable amount will be indexed for inflation and rounded to the next multiple of $100 (the amount for 2020 remained at $1,400, but see Editor’s Note, above).³

A new family tax credit was created to allow for a $500 nonrefundable credit for dependent parents and other non-child dependents (the requirement for furnishing a Social Security number does not apply to this family tax credit).⁴

The child tax credit is generally a tax credit that is available for each “qualifying child” (defined below) of eligible taxpayers who meet certain income requirements. The child tax credit may be refundable to the extent that the taxpayer has three or more qualifying children or for a certain portion of the taxpayer’s earned income (see below). The child tax credit is now $2,000 ($1,000 prior to 2018) per child.⁵

The term qualifying child means a “qualifying child” of the taxpayer (as defined under IRC Section 152(c) – see below) who has not attained the age of 17;⁶ and

(1)  who is the taxpayer’s “child” (see below) or a descendant of such a child, or the taxpayer’s brother, sister, stepbrother, or stepsister or a descendant of any such relative;

(2)  who has the same principal place of abode as the taxpayer for more than one-half of the taxable year; and

(3)  who has not provided over one-half of his or her own support for the calendar year in which the taxpayer’s taxable year begins.⁷

Additionally, a qualifying child must be either a citizen or a resident of the United States.⁸

The term “child” means an individual who is: (1) a son, daughter, stepson, or stepdaughter of the taxpayer; or (2) an “eligible foster child” of the taxpayer.⁹ An “eligible foster child” means an individual who is placed with the taxpayer by an authorized placement agency or by judgment decree, or other order of any court of competent jurisdiction.¹⁰ Any adopted children of the taxpayer are treated the same as natural born children.¹¹

The amount of the credit is reduced for taxpayers whose modified adjusted gross income (MAGI) exceeds certain levels. A taxpayer’s MAGI is adjusted gross income without regard to the exclusions for income derived from certain foreign sources or sources within United States possessions. The credit amount is reduced by $50 for every $1,000, or fraction thereof, by which the taxpayer’s MAGI exceeds the following threshold amounts pre-reform: $110,000 for married taxpayers filing jointly, $75,000 for unmarried individuals, and $55,000 for married taxpayers filing separately.¹² For 2018-2025, the threshold amounts increase to $400,000 (joint returns) or $200,000 (all other filers). The phase out amounts are not indexed for inflation.¹³

The child tax credit is also refundable (only a portion of the expanded credit is refundable). Prior to the 2017 tax reform, if the child tax credit exceeded the taxpayer’s tax liability, a taxpayer with one or two children could receive a refund of the lesser of the unused amount of the credit or 15 percent of earned income in excess of $3,000.¹⁴ For families with three or more qualifying children, the amount of the refundable credit is the greater of (1) 15 percent of earned income over $3,000 or (2) the sum of Social Security and Medicare taxes paid minus the earned income credit. For 2018-2025, $1,400 of the credit is refundable ($1,700 in 2024-2025, $1,600 in 2023 and $1,500 in 2022) and only the refundable portion is indexed for inflation under the 2017 tax reform legislation.

The nonrefundable child tax credit can be claimed against the individual’s regular income tax and alternative minimum tax (see Q 8574 and Q 8576). The tax credit cannot exceed the excess of (i) the sum of the taxpayer’s regular tax plus the alternative minimum tax over (ii) the sum of the taxpayer’s nonrefundable personal credits (other than the child tax credit, adoption credit, and saver’s credit) and the foreign tax credit for the taxable year.¹⁵ Finally, the refundable child tax credit is not required to be reduced by the amount of the taxpayer’s alternative minimum tax.¹⁶

Some additional restrictions applying to the child tax credit include: (1) an individual’s tax return must identify the name and taxpayer identification number (Social Security number) of the child for whom the credit is claimed; and (2) the credit may be claimed only for a full taxable year, unless the taxable year is cut short by the death of the taxpayer.¹⁷

For purposes of applying a uniform method of determining when a child attains a specific age, the IRS has ruled that a child attains a given age on the anniversary of the date that the child was born (e.g., a child born on January 1, 1987, attains the age of 17 on January 1, 2004).¹⁸