What Is the Child Tax Credit?

Raising children can be expensive, as every parent reading this already knows. Thankfully, some pretty valuable tax breaks are designed to help ease the financial burden on parents in the U.S., and none is more widely available than the child tax credit.

In this article, we'll discuss what the child tax credit is, who can claim it, and an alternative for taxpayers with dependents who don't quite meet the IRS definition of a "child."

Image source: Getty Images.

How much is the child tax credit worth?

The Tax Cuts and Jobs Act doubled the child tax credit from its prior level starting in the 2018 tax year.

The child tax credit is currently worth $2,000 per qualifying dependent child. For parents to take the credit, the child must be 16 years old or younger at the end of the tax year. In other words, if you have a child who turned 17 in 2020, you cannot take the child tax credit for them on your 2020 tax return when you file it. (However, there's another credit that applies -- more on that later.)

What's more, as much as $1,400 of the child tax credit is refundable. This means that it can be claimed by taxpayers whose tax liability is already zero.

A couple of details to note. First, the child tax credit can be claimed for every qualifying child. If you have 10-year-old triplets, for example, you may be able to get a credit of $6,000. Second, this is a tax credit, not a deduction. This means that the child tax credit will reduce your tax bill dollar-for-dollar. If you owe $8,000 in tax for 2020 after considering your deductions, and you have two qualifying children, it could reduce your tax liability to $4,000.

Do you qualify?

Like many tax breaks, the child tax credit is income-restricted. The credit is designed to help working families -- not the wealthy. But the Tax Cuts and Jobs Act didn't just double the child tax credit from its pre-2018 level; it also dramatically increased the income limits, thereby making the credit available to far more American families than in previous years.

The income limitations aren't designed to adjust upward for inflation over time, so here's a chart of the child tax credit income thresholds that apply to all tax years from 2018 through 2025, according to current tax law:

Data source: IRS.

Here's what this means. If your income is below the maximum AGI for the full credit, you are eligible for the entire $2,000 ($1,400 refundable) credit per qualifying child. If your income falls between the two thresholds listed for your filing status, you're entitled to some, but not all, of the child tax credit. In other words, a single taxpayer with a $220,000 AGI would be entitled to $1,000 per qualifying child. Finally, if your income is equal to or greater than the higher threshold, you cannot claim the child tax credit at all.

What if your dependents are over 16?

The child tax credit only applies to dependents who are 16 or younger at the end of the tax year. But what if you have a 17-year-old? What if you still financially support your college-age child? Or what if you are caring for an aging relative?

Fortunately, the Tax Cuts and Jobs Act created an additional credit to address these situations. There is a $500 nonrefundable credit that applies to dependents who don't meet the age requirement for the child tax credit. It's not quite as valuable, but it's certainly better than the $0 tax break Americans were previously entitled to in these situations.

The Foolish bottom line on the child tax credit

The child tax credit can save parents thousands of dollars each year when they file their tax returns, so it's one of the most important tax breaks to know about. While this is unlikely to come close to offsetting the actual cost of raising children, it is certainly a very valuable tax break for working parents.