Child Tax Credit (2023 In-Depth Review)

One of the ways the United States government incentivizes people to have children is by offering those with dependents under a certain age the child tax credit. At the height of the pandemic, when many parents were struggling financially, the IRS increased the child tax credit from $2,000 per child up to $3,000 or $3,600 (depending on their age), with half of those credits available as advanced monthly payments. Those higher amounts expired after the 2021 tax year, so for those filing their taxes in 2023, the credit amounts revert back to $2,000 per child. There are some additional changes involving the amount of those credits that is refundable to you, which we explain further below.

Tax credit vs. deduction

A tax credit is a dollar-for-dollar amount subtracted from your Internal Revenue Service tax bill. A tax deduction is an amount that comes off of your taxable income, which can reduce the amount of taxes you owe. In the case of the child tax credit, we are talking about a credit rather than a deduction.

For example, let’s take Mario. Mario makes $60,000 a year and receives a tax credit for $5,000. His tax bill is around $7,000, and thus, he can apply that $5,000 in tax credit to his $7,000 tax bill. The result is that Mario only needs to pay $2,000 tax now, as seen below.

Tax credits: refundable vs. nonrefundable

Sometimes, if your income is low enough and you qualify for enough credits, you can have more in tax credits than you owe in tax. If the tax credit is refundable, then the government sends you the difference between what you owe and your credit in the form of a tax refund.

Let’s take a look at Mario’s example below. In this scenario, he only makes $40,000 a year and so doesn’t owe as much in taxes.

In this case, Mario only owes $3,000 in tax but has $5,000 in tax credits. As the tax credits are all refundable, Mario will receive a net +$2,000 from the government.

How to qualify for a child tax credit

In order to qualify for a child tax credit of up to $2,000 per child, the following criteria must be met for each qualifying child:

Age

The child or dependent must be under age 17 at the end of the year.

Citizenship status

The child must be a U.S. citizen, U.S. national, or a resident who has a foreign passport but is legally allowed to live in the U.S., with a permanent green card, for example.

Social Security status

The qualifying child must hold a valid Social Security number.

Relationship

The child must be a son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or descendant of the tax filer.

Living situation

The child must live with the tax filer who is claiming “head of household” for over six months a year.

Properly filed as dependent

The child must be properly filed as a dependent on your tax returns. Each additional dependent must coincide with each additional child tax credit.

Financial support

The child must provide no more than half of their own financial support during the year. If the filer is divorced, and the child continues to live with the other spouse who pays the majority of their expenses, this could cause issues.

I qualify for a child tax credit, but how do I claim it?

If you have filed a tax return before, you are probably familiar with Form 1040, which all individual taxpayers must file in the United States. You will need to list all dependents, including children, on your 1040. You then need to make sure you complete schedule 8812 to qualify for the tax credit.

Child tax credit structure can change

As we said, in 2023, there will be no more monthly advanced payments of the child tax credit. However, Scott Sturgeon, senior wealth advisor at Oread Wealth Partners, says this should not be too drastic a change for many people. “I don’t know that the change from monthly payment to a typical tax credit has changed anything for clients from a cash flow perspective, but it definitely opens the door for discussion around how tax credits work, how they differ from tax deductions, and how we can be on the lookout for both,” he says. “Tax planning in today’s environment is often about lots of ‘little wins,’ rather than some huge tax loophole or something you might see in the movies.”

Nicole Rosen, who is an enrolled agent, which the IRS considers a tax expert, says we are unlikely to get that monthly payment structure back for the child tax credit.

I don’t believe we will have any sort of permanent monthly advance payment in the near future. Right now our elected officials are pretty evenly split down party lines, which means neither side is going to have a clear advantage in getting everything they want signed into law. While a permanent monthly advance payment has support, I don’t believe it has enough support for it to pass prior to our next major election.”

Child and dependent care credit

It’s easy to confuse the child tax credit with the child and dependent care credit, but they are different. The dependent care credit is designed to help you get some money back for daycare and other expenses involved in the care of a dependent. Those can be astronomical, so every little bit helps. This has also changed from 2021 when it went up to $4,000 for one person and up to $8,000 for two or more people. Now it’s down to $3,000/$6,000, and only a certain percentage of expenses qualifies. Still, if you had those expenses, it is worth pursuing the credit in addition to the child tax credit.

Get help preparing your taxes

The ever-changing tax laws can be confusing, so you might want to seek help from a professional when preparing your taxes. Here are some to consider.

FAQ

Are we getting child tax credit payments in 2023?

There are no advance monthly payments as there have been available in previous years. But you can still get a credit. You will need to file your returns first to determine if you qualify for a child tax credit of up to $2,000 per child.

How do I qualify for a child tax credit?

In order to qualify for the child tax credit, you must file as head of household. You must also be under the income threshold. If you meet these two qualifications, the rest depends on the status of the child. Their citizenship/residency status, living situation, Social Security status, and other factors all determine whether they qualify.

What is the child tax credit income limit?

The limit on adjusted gross income to receive a child tax credit is $200,000 for single filers and $400,000 for joint filers. If you make more than these amounts, you might still receive the credit, but it will be reduced.