Eligibility for tax credits can be a real bonus for taxpayers. Unlike deductions, which just lower the income the Internal Revenue Service taxes you on, credits come off the bottom line -- they decrease what you actually owe the government. Some credits are even refundable: if they amount to more than what you owe, the IRS will send you a check for the difference. For example, the regular child tax credit isn't refundable. All it can do is erase your tax bill, and if there's a surplus, it goes to waste. However, some taxpayers can receive a refund anyway by claiming the additional child tax credit.
Child Tax Credit
The additional child tax credit is an offshoot of the child tax credit, which allows qualifying taxpayers to reduce their bill to the IRS by up to $1,000 per child. The child must be your dependent, although she doesn't necessarily have to be your biological child -- she can be your foster child, adopted child, sibling, niece or nephew, grandchild -- as long as she lives with you and meets the other IRS requirements for being your dependent. You can receive a child tax credit for these qualifying children until the year in which they turn 17.
As with many credits, the IRS limits the child tax credit if you earn too much. If you file your taxes as single or head of household, your modified adjusted gross income – your AGI plus certain adjustments – must be less than $75,000. This increases to $110,000 if you're married and filing jointly with your spouse, and it drops to $55,000 if you’re married but filing separately. If your income exceeds these thresholds, your child tax credit reduces by $50 for every $1,000 you go over. For example, if you file as head of household, and if your MAGI is $80,000, you must subtract $250 from your available credit, or $50 times five. Your child tax credit would be $750.
The additional child tax credit comes into play if you're eligible for the child tax credit, but you don't owe that much in taxes. For example, you might qualify for the full $1,000 credit but owe the IRS only $500. The child tax credit erases your $500 tax liability, and normally, the IRS would keep the $500 balance. The ACTC allows you to claim a refund anyway if you meet one of two qualifying criteria: Your earned income for the year was more than $3,000, or you have at least three children who qualify as your dependents.
Amount of Credit
The additional child tax refund depends on how much you earn. Typically, it's 15 percent of the amount of your income over $3,000, with a cap equal to the unused portion of your child tax credit. For example, if you earned $30,000, your income over $3,000 is $27,000. Fifteen percent of this is $4,050. Because $4,050 is more than the maximum credit, you'd receive the full portion of the unused credit. If you had received $700 of the $1000 child tax credit, you'd receive a $300 ACTC. The ACTC essentially turns the nonrefundable child tax credit into a refundable credit.
If, however, you have three or more qualifying children, you can calculate the ACTC a different way, following the instructions on Form 8812 and calculating the differences between your withheld Social Security and Medicare taxes, and any earned income tax credit you received -- again, up to the amount of the unused portion of your child tax credit. You can elect whichever calculation results in more of a refund to you.
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