All You Need To Know About Child Tax Credit

Americans say “Happy New Year” and not “Happy End of Tax Year 2023” for a reason—yes, one definitely flows nicer. But more importantly, Americans don’t like to think about taxes and the pile of tax forms awaiting them in their emails and mailboxes in the New Year.

However, even though most Americans don’t dream of 1040s and w-2s, it pays to stay studied on taxes and your tax situation. You might be eligible for certain deductions or credits, and might be able to reduce your tax bill with just a little bit of foresight.

Parents in particular have one big credit to keep in mind come tax time—the Child Tax Credit. In this article, we’ll touch on what it is, what you need to be eligible for it this year (and in the future), and how much you can expect to get from it.

What is the Child Tax Credit?

The child tax credit is a federal tax credit offered to parents. It’s sometimes referred to as the CTC.

The CTC was established as part of the 1997 Taxpayer Relief Act. However, the CTC has transformed greatly over the years. In 2021, it was given its most considerable expansion in over a decade with the passing of The American Rescue Plan in 2021.

The amended and beefier CTC passed amid the COVID-19 pandemic, high inflation in childcare and education costs, and a slowdown in overall birth rates in the United States (and globally.)

Like its many expansions before, the CTC’s latest changes are intended to help support parents. And although the CTC does little to resolve systemic problems, it does provide a valuable credit to parents come tax time.

In early 2024, the House of Representatives also approved a bill to expand the Child Tax Credit, calling it the Tax Relief for American Families and Workers Act of 2024. Though, at the time of writing this in March 2024, it does not yet have Senate support, the bill will be substantial - particularly for working families.

It's expected to lift more than 400,000 children above the poverty line and give additional financial support to 3 million children in families below it.

Who is Eligible for the Child Tax Credit?

For most parents, the CTC is fairly easy to claim. If you have a child and they are your dependent, you probably qualify to receive the entirety of the credit.

Among other significant changes to the CTC in the 2021 bill was a massive increase in the phaseout limits on the credit, which means more Americans than ever will be eligible for this credit. assuming you do not make more than $200,000 per year (or $400,000 if married and filing jointly.) In 2022, a record 40 million families were eligible.

Again, the revised 2024 tax credit has not yet been passed. Plan your tax situation for 2024 based on 2023 guidelines.

Here are the important criteria to bare in mind:

• You must be a taxpayer with a valid Social Security Number
• You must have a dependent child under the age of 17 at the end of 2022
• Your dependent child must hold a valid Social Security Number
• Your dependent child must have lived with you for at least half the year
• You must have covered more than half of the child’s own financial support
• Your dependent child must be familially related for you to claim them (e.g: a son, stepdaughter, half sister, foster child, or descendant of any of those people for which you could take care of.)

Assuming you check all these boxes, there are good odds that the Child Tax Credit could be in your future… or rather, your tax return’s future.

However, if you have any questions as to your eligibility to claim your dependent child, or need to better understand if your child fits the bill of a dependent child, you might want to consult a Certified Public Accountant.

How much will I get from the Child Tax Credit?

Families filing their taxes for 2023 will be eligible for the $2,000 per dependent under age 17.

In other words, if you have one child, you will receive $2,000. If you have two children, you will receive $4,000. If you have three, $6,000, and so on and so forth.

Parents who have claimed the CTC last year might be perplexed—”why is it so low?” Well, parents received a top-up during COVID which added up to $1,600 to the CTC. This was part of the American Rescue Plan.

The credit was also fully refundable in 2021, and will not be in 2023. You can't receive the entire $2,000 back as a tax refund, even if you have a $0 tax liability and qualify for the full amount.

These special one-year provisions ended in tax year 2022, so the CTC has returned to its normal status for 2022, 2023, and beyond.

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What about state-specific child tax credits?

Despite its ‘return to form’, a dozen states are offering their own child tax credit—and most of these states have made the credit refundable (those names are in italics in the list below.)

The states offering a tax credit include:

• California
• Colorado
• Connecticut
• Idaho
• Maine
• Maryland
• Massachusetts
• Minnesota
• New Jersey
• New Mexico
• New York
• Oklahoma
• Oregon
• Utah
• Vermont

Of these, 11 states have made the child tax credit refundable.

Other Things You Might Consider

As always, if you have any questions about your return or your tax situation, you might want to consult the services of a Certified Public Accountant (CPA.) These are experienced financial professionals who can help you reach your financial goals and better understand your tax situation.

However, aside from asking, here are some other things to consider as it pertains to the child tax credit in tax year 2023:

• Missed the CTC last year? Refile. If you have not yet filed for tax year 2021, or maybe missed the CTC on your last year tax return, you might be eligible to amend your last year return. As always, consult a CPA or finance professional before doing this.
• Research the EITC. In some cases, low-to-moderate income earners might also want to see if they’re eligible for the Earned Income Tax Credit. This is a credit for workers with qualifying children, and it is additive to the CTC. In other words, it could help you reduce your tax liability even further.
• Finish filing. If you are doing your taxes by yourself, consider using a low-cost alternative such as FreeTaxUSA or Credit Karma Tax. Otherwise, if you are consulting the services of an accountant to do your taxes, make sure they have a CPA or another credential of value.

How Can I Use The Child Tax Credit To Benefit My Child’s Future?

The CTC benefits many parents directly by reducing their taxable income, but for parents lucky enough to receive a refund, parents might be inclined to run to Best Buy and purchase a TV. In this economy? Maybe don’t do that.

Instead, consider putting the CTC towards paying for childcare expenses, putting money towards your child’s 529, or spinning up a custodial brokerage account for your child. All of these things have benefits, but the latter two in particular have meaningful benefits for your child’s future.

With EarlyBird, you can start a custodial brokerage account for your child and make recurring deposits into high-quality funds based on your desired levels of risk, the time horizon of your investment, and other factors.

What better way to spend your CTC than on investing in your child’s future? Get started today.

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