How Does the Child Tax Credit Calculate in Tax Year 2021?
As part of the American Rescue Plan, the Child Tax Credit (CTC) was significantly expanded in both amounts and eligibility, but only for tax year 2021. Moreover in 2021, the CTC was 100% refundable and there was no earned income requirement for the taxpayer to receive the full amount of the credit.
Specifically, in the 2021 tax return a taxpayer could receive a refundable CTC of $3,600 for each eligible child under the age of six and $3,000 for each eligible child ages 6 to 17. In many cases up to half of the credit was paid in advance to the taxpayer based on information in previous year returns and the remaining portion of the credit was included as a refundable credit in the 2021 tax return.
How Does the Child Tax Credit Calculate in Tax Year 2022?
For tax year 2022, the CTC has reverted to its original requirements of $2,000 for every eligible dependent under age 16, and subject to certain earned income limitations only $1,500 of the credit is refundable
In tax year 2022, qualifying families will no longer get advanced credit payments or reconcile any CTC amount on their return. Instead, taxpayers will claim the CTC when they file the tax return in 2023. The $2,000 for each eligible child is first applied against any income tax liability on the return. This is the nonrefundable portion of the CTC, and how this credit is calculated and applied against the tax liability is shown on Schedule 8812.
If the income tax on the return has been reduced to zero, any remaining CTC up to $1,500 for each eligible child may become a refundable credit (referred to as the Additional Child Tax Credit or ACTC) based on the earned income reported on the tax return.
The ACTC is calculated when a taxpayer has at least $2,500 in earned income. The calculation of the refundable ACTC is 15 percent of earned income above $2,500, up to $1,500 per child. This is shown on the following example:
A taxpayer is filing as Head of Household and has two eligible children ages 4 and 6 claimed on the return. The taxpayer has $15,000 in income from wages and no other income. Since the income is less than the standard deduction amount for HOH in 2022 ($19,400) there is no income tax liability on the return. Thus, the Additional Child Tax Credit would be $1,875, calculated as 15% of the earned income over $2,500 ( ( $15,000 – $2,500 ) x 15% ). This calculation is also shown on Schedule 8812.
Additional Information:
2020-2022 Year Over Year Tax Provisions Comparison