2023 Child Tax Credit: Understanding Its Value and Impact

If you have children or other dependents under the age of 17, you likely qualify for the Child Tax Credit. In 2021, it was temporarily expanded as part of the American Rescue Plan, which was signed by President Biden in March of that year to help families deal with the financial hardships stemming from the COVID-19 pandemic. IRS refund with child tax credit 2023. There are several income limits you should know about when planning how much you’ll receive.

Planning for your family’s finances goes beyond taxes. A financial advisor can help you create a long-term financial plan.

What Is the Child Tax Credit, and How Does It Work?

The Child Tax Credit (CTC) is designed to give an income boost to the parents or guardians of children and other dependents. This credit applies to dependents who are 17 or younger as of the last day of the tax year.

The child tax credit is limited to $2,000 for every dependent you have that’s under age 17. Modified adjusted gross income (MAGI) thresholds for single taxpayers and heads of household are set at $200,000 to qualify, and $400,000 for joint filers.

As a reminder, tax credits directly reduce the amount you owe the IRS. So, if your tax bill is $3,000, but you’re eligible for $1,000 in tax credits, your account is now $2,000. This differs from a tax deduction, which reduces how much of your income is subject to income taxes.

The American Rescue Plan temporarily increased the CTC for tax year 2021 to help filers cope financially with the pandemic. At that time, the credit was worth up to $3,600 per dependent, though your income level determined precisely how much you’d get. As you can tell above, the credit has since come back down to its normal state post-pandemic.

For the 2021 expanded child tax credit, the IRS began sending half of the credit as payments on the 15th of every month from July through December, with the other half being claimed by families on their tax returns. As of now, this process no longer exists, meaning qualifying families will only get the credit when they file their return.

Which Dependents Are Eligible for the 2023 Child Tax Credit?

Eligibility for the CTC hinges on a few factors. The child you claim as your dependent has to meet seven pieces of criteria from the IRS:

Age Test: The child was under age 17 at the end of the tax year. The CTC is increased for children under age 6.Relationship Test:  The child is your daughter, son, stepchild, foster child, adopted child, brother, sister, stepbrother, stepsister, half-sister, or half-brother. The child can also be the direct descendant of any of those just mentioned (your grandchild, niece, or nephew).Support Test: The child did not provide more than half of their support for the tax year.

The child also cannot file a joint return that year. Dependent Test: The child must be claimed as your dependent on your federal tax return.Citizen and Resident Test: The child has to be a U.S. citizen, a U.S. national, or a U.S. resident alien. The child must also have a Social Security number. Residency Test: The child must have lived with you for more than half of the tax year.Income Test: This is the same requirements as the ones listed earlier. In short, the CTC begins phasing out for families with income above $200,000 (single filers) or $400,000 (joint filers).

How to Claim and Track Your Child Tax Credit

Here’s what you need to know about claiming your credit. Eligible filers can claim the CTC on Form 1040, line 12a, or Form 1040NR, line 49. To help you determine precisely how much of the credit you qualify for, you can use the Child Tax Credit and Credit for Other Dependents Worksheet provided by the Internal Revenue Service. If you need to file a return for a year before 2018, you can only claim the credit on Forms 1040, 1040A, or 1040NR.

Eligible recipients who did not receive the right amount or nothing at all should verify their information on the IRS Child Tax Credit Update Portal. For cases where the portal shows that payment has already been disbursed but not received, a trace or inquiry to locate funds can be filed by mailing or faxing Form 3911 to the agency.

There could be a payment delay depending on the disbursement method. The IRS says that it can trace payments:

5 days after the deposit date and the bank says it hasn’t received the payment4 weeks after the payment is in the mail by check to a standard address weeks after the payment the mail, and you have a forwarding address on file with the local post office9 weeks after the payment is in the mail, and you have a foreign address

The agency updates its frequently asked questions page with information about Child Tax Credit payments and posts notifications about delays.

Other Credits for Children and Dependents

There are additional federal and state provisions that help families care for children and other dependents.

Child and Dependent Care Tax Credit (CDCTC)

You can claim this credit if you have earned income and if you’re paying someone else to care for a dependent. Unlike the CTC, which you can only claim if you’re the parent or guardian of minor children, you can claim the CDCTC for aging parents and other disabled relatives. Qualifying dependents for the CDCTC include the following:

Children who are 12 or younger at the end of the tax year dependent adult family members or spouses who are not able to care for themselves due to mental or physical impairments, unless they had a gross income of $4,300 or
more

With the CDCTC, you can claim a credit from 20% to 35% of qualified care expenses for tax year 2022 (which you file in 2023). The exact percentage that you are eligible to deduct depends on your income level. The maximum amount of care expenses to which you can apply the credit is $3,000 if you have one dependent and $6,000 if you have more than one dependent.

The CDCTC is non-refundable. According to the IRS, expenses that qualify for the CDCTC include money that you paid “for household services and care of the qualifying person while you worked or looked for work.” Child support payments do not qualify. To claim the CDCTC, you need to fill out Form 2441.

State Credits

Some states offer a complementary state-level CTC and/or CDCTC that matches part or all of the federal credit. In some states, the credits are refundable and in other states, they are not. This state-by-state guide breaks down which states offer their own Earned Income Tax Credit or CDCTC.

Conclusion

The IRS offers child tax credits to help parents and guardians offset some of the costs of raising a family. If you have a dependent who isn’t your direct child, you may also be eligible to claim a credit. And because some child tax credits are refundable, you might even make some money in the end.

Remember that the information surrounding 2023 child tax credits can change each year. In turn, it’s essential to keep up with the current laws each tax year so you know what to expect.

Glossary:

1. Child Tax Credit (CTC): A tax benefit offered in many countries designed to help families with the cost of raising children.
2. Tax Year 2023: The year for which taxes are filed, usually by April 15, 2024.
3. IRS (Internal Revenue Service): The U.S. government agency responsible for the administration of tax laws and the collection of federal income tax.
4. Adjusted Gross Income (AGI): This is the total income of a person minus specific deductions.
5. Taxable Income: This is the amount of income used to calculate an individual’s tax liability.
6. Tax Liability: The total amount of tax that an individual, corporation, or other entity is obligated to pay to the tax authority.
7. Tax Deduction: A reduction of income that is able to be taxed and is commonly a result of expenses, particularly those incurred to produce additional income.
8. Tax Credit: A tax credit is an amount of money that taxpayers can subtract directly from taxes owed to their government.
9. Tax Refund: A refund on taxes when the tax liability is less than the taxes paid.
10. Earned Income: Money derived from paid work.
11. Tax Exemption: A monetary exemption which reduces taxable income.
12. Dependent: A person who is dependent on the tax payer for financial support and who has a specific relationship with the taxpayer.
13. Nonrefundable Tax Credit: A type of tax credit that cannot reduce the amount of tax owed to less than zero.
14. Refundable Tax Credit: A tax credit that can reduce the amount of tax owed to zero and any remaining amount is refunded to the taxpayer.
15. Tax Return: The form or forms used to report income and file income taxes with tax authorities.
16. Filing Status: The type of tax return form a taxpayer qualifies to use based on marital status and family situation.
17. Monthly payments: Monthly payments refer to the set amount of money paid each month for a specific service, loan, or any financial obligation over a fixed period of time.
18. Child poverty: Child poverty refers to the state where children are living in households with income levels below the poverty line, lacking basic resources and necessities such as food, shelter, education, and healthcare, which hinders their survival, development, and future opportunities.
19. New child tax credit: The new child tax credit is a financial benefit provided by the government to eligible taxpayers for each qualifying dependent child. The amount and eligibility criteria may vary depending on the tax law changes.
20. Refundable tax credits: Refundable tax credits are types of tax benefits that can reduce a taxpayer’s liability beyond zero, potentially resulting in a refund from the government.
21. Additional child tax credit: The Additional Child Tax Credit is a refundable credit that taxpayers may be eligible for if they have a qualified child and they did not receive the full amount of the Child Tax Credit. This credit may provide a refund even if the taxpayer owes no tax.