Contributed by: PhillipB, FreeTaxUSA Agent, Tax Pro
You may remember during the pandemic getting a massive $3,000 to $3,600 per child refundable child tax credit that was paid throughout the year – that was nice, wasn’t it? However, now you may be wondering why you never see anywhere near the $2,000 per child tax credit in your refund.
Apart from 2021, the child tax credit is a nonrefundable tax credit (the credit can only be used to lower income tax toward zero) with a partially refundable credit called the additional child tax credit if the nonrefundable child tax credit is not fully utilized.
If there is any child tax credit remaining, the refundable additional child tax credit is calculated as follows:
- The credit for each child is reduced to $1,700.
- If the earned income on the return is less than $2,500, there is no additional child tax credit.
- If the earned income is above $2,500, the earned income is reduced by $2,500.
- The reduced earned income is reduced again by multiplying the reduced earned income amount by 15%. This is likely the amount of the taxpayer’s additional child tax credit.
- If there are 3 kids or more, or the taxpayer is a bona fide resident of Puerto Rico, there is an alternative calculation.
- All social security, Medicare, and additional Medicare taxes from the W-2 are added to deductible self-employment tax, uncollected social security and Medicare taxes on wages, tips, and group term life insurance.
- All earned income credit and excess social security, and tier 1 railroad retirement tax credits are added together.
- The taxes are subtracted from the credits.
- If the amount is greater than the calculation using the first method and less than the reduced earned income, the alternative calculation is used for the additional child tax credit amount.
Example:
James has three kids under the age of 16, and his W-2 income is $10,000. The W-2 is all his income. Since his total income is well below the standard deduction, he doesn’t use any of the nonrefundable child tax credit.
For his additional child tax credit, the total $6,000 child tax credit is reduced to $5,100 ($1,700 x 3). Next, his earned income is first reduced to $7,500 (10,000 - $2,500) and then reduced by taking only 15% of the reduced earned income to a total remaining amount of $1,125. This is the tentative additional child tax credit.
Since he has 3 children, he needs to see if the alternative calculation is higher. With his income at $10,000 and he has no self-employment income and no uncollected tax on wages, tips, or group term life insurance, his total social security and Medicare tax amount is $765. His income is in a sweet spot for a very high earned income tax credit, he has a $4,511 earned income tax credit. The earned income credit is subtracted from the social security and Medicare taxes.
The high earned income tax credit is great! However, since his earned income credit is much higher than his social security and Medicare taxes, the alternative additional child tax credit calculation is zero. Therefore, the refundable additional child tax credit for James is $1,125.