Additional Child Tax Credit
A refundable facility that a taxpayer can benefit from if their Child Tax Credit exceeds the total income tax amount they currently owe the government.
How Additional Child Tax Credit Works
In practice, the tax authorities usually grant tax credits to reduce a tax liability that a person owes the government; these usually come in refundable and non-refundable forms. For non-refundable tax credit, the government does not pay the difference between the tax credit and the tax liability; this is especially true in cases where the credit exceeds the liability. Regardless, for refundable tax credits, the government pays the difference between the tax credit and the tax liability.
Generally, the ACTC arises from the Child Tax Credit; the latter usually provides a specified tax credit of $1,000 per child for a maximum of three children. Further, the ACTC grants a percentage of the regular Child Tax Credit that a taxpayer could not claim as refundable; in the past, the Child Tax Credit existed in the form of the initial tax credit for children; this was, however, non-refundable. In essence, this meant a family could forfeit a tax surplus if the credit amount were above the tax liability that it owed the government. To illustrate, a family that only owed $200 but claimed $1,000 in tax credits would automatically lose the $800 tax surplus (in other words, the government wouldn’t pay the difference of $800).
The authorities created ACTC to serve as a refundable means to enable families to benefit from the surplus. Overall, the individual claiming the ACTC must meet the requirements of the Child Tax Credit, meaning:
- The child must be a citizen
- The child must be under nineteen years of age
- The child must have lived with the claimant for a period exceeding half the tax year
- The application should be a dependent claim
- Throughout the tax year, the claimant must not have provided more than half the financial support
- The individual must have earned at least $3,000 in income
Real-Life Example of Additional Child Tax Credit
Jane, a lady who lives in Florida, USA, has three children growing up under her care. Her overall annual earnings amount to $75,000 per year. Since she met all the criteria for the Additional Child Tax Credit, Jane was eligible to claim the ACTC. Thus, Jane decided to claim the ACTC for her fourteen-year-old daughter, Yvonne (this was appropriate since Yvonne would still be under eighteen at the close of the tax year). Further, since Yvonne could not support herself financially throughout the specified period, Jane’s claim passed the Support Test.
Next, the authorities subjected Jane’s claim to the Dependent test- this required her to prove the child was a dependent; it further meant the authorities would subject the child to the Relationship Test (to check whether Yvonne is below nineteen, as the law prescribes). Finally, the authorities carried out the Residence Test to confirm whether Jane lived with the child for a period exceeding half the tax year and whether Yvonne was a legal citizen. Having certified that this claim met all the requirements, the authorities declared Jane’s claim for the additional child tax credit as successful; ultimately, this meant that Jane now qualified for a tax reduction as well as a tax refund.
Significance of Additional Child Tax Credits
The ACTC offers parents a golden chance to reduce their tax bill and help offset the colossal costs of raising a child in countries like the US and Canada. This means that parents can use the ACTC to put more money right back into their own pockets, benefitting themselves and their children. Generally, the authorities intended the additional tax credit to help low—to moderate-income working parents.
Thus, you can claim the ACTC if you earn a minimum of $2,500 per year; these earnings can come from self-employment, wages, salaries, or disability payments. Since the US Congress signed into law the Consolidated Appropriations Act (CAA) in December 2020, many taxpayers can use their 2019 earned income in calculating both the ACTC and the Earned Income Tax Credit (EITC). This is particularly true if your earned income in 2019 was higher than the 2020 income.
Recent estimates indicate that close to 94% of families with children—categorized in the second income quintile—are in line to receive the ACTC. Under the Additional Child Tax Credit regime, many families got a refundable credit that matched some 15% of their total earned income. However, the recent tax reforms simplified the credits, combining them into a single $2,000 credit. Moreover, it allows taxpayers to benefit by reducing their income threshold, thus raising the phase-out levels.
Additional Tax Credit Vs. Additional Child Tax Credit
The additional tax credit is meant to help people who receive less than the total child tax credit claim; the additional child tax credit is refundable. On its part, the child tax credit is not refundable. Note that a refundable tax credit helps taxpayers reduce their tax liability down to zero; they are still eligible to receive a refund despite this.