How to Calculate the Child Care Tax Credit

In a 2017 study released by the USDA, the cost of raising a child ages 0-17 was around ​$14,000​ per year. Although this is an estimate and is a number based on a two-child household of married couples, it is still a shocking amount of money to think about.

There have been numerous past government leaders who worked hard to put tax breaks in place for families who are trying to raise kids on all sizes of incomes. One such break is the Child Care Tax Credit. With significant changes over recent years, many families have experienced a significant difference in their tax returns.

Simply stated, the Child Tax Credit is a tax break for parents raising children under the age of 18. Like other tax credits, it will decrease your tax responsibility dollar-for-dollar. In some cases, a tax credit will cover more than what you owe in taxes and a portion of the overage or all of the overage will come to you as a refund. The Child Tax Credit works just like that, with a hefty portion of it being refundable.

​Consider Also​: Child Tax Credit: What is it & How to Qualify

Former President Trump, in his Tax Cuts and Jobs Act of 2017, increased the Child Tax Credit by ​$1,000​ per qualifying child. This took the credit from ​$1,000​ per child under 17 to ​$2,000​ per child under 17. The refundable portion was set to ​$1,400​ per qualified child under the Tax Cuts and Jobs Act as well. The reform also increased the ceiling on the income limit to ​$200,000​ for single filers and ​$400,000​ for married filing jointly households. With that kind of increase in the Child Tax Credit, families felt a massive relief from taxes, especially larger families.

Even more recently, in the spring of 2021, under President Biden's American Rescue Plan, the Child Tax Credit was again changed. Because of the COVID-19 pandemic, there were special changes implemented to help keep families afloat.

Under this plan, the age cutoff for the Child Tax Credit jumped to age ​17​. Further, amounts rose to ​$3,600​ per qualified child under 6 and ​$3,000​ per qualified child under 18. However, the threshold on income limitations decreased to ​$150,000​ for married filing jointly households and ​$112,500​ for head of household filers.

In addition, through the American Rescue Plan, the credit was partially disbursed to many families as a monthly payment starting in July 2021 and ending in December 2021. Households that qualified based on last year's tax returns, were sent automatic payments around the 15th of the last six months of 2021. It is important to note that Biden's plan only provides this increase for the 2021 tax year to help alleviate any financial hardships from the COVID-19 pandemic.

​Consider Also​: What's Different About the 2021 Child Tax Credit?

As explained above, if the Child Tax Credit is more than what you owe for taxes, it is refundable. Under the TCJA, only ​$1,400​ of the ​$2,000​ was refundable. However, for 2021, under the American Rescue Plan Act, the credit is entirely refundable. But how do you access that refund when filing?

In order to know if you qualify for the refundable amount (must be below the income threshold), you will need to fill out the Child Tax Credit Worksheet as you complete your Form 1040. If you qualify, you will be directed to fill out Schedule 8812, which will help you claim the refundable amount through what is called the Additional Child Tax Credit.

This worksheet Schedule 8812 will calculate how much of the refundable amount you are eligible to receive back in your return. It basically takes the difference on your Child Tax Credit Worksheet between what you owe for taxes and the amount of CTC that you qualify for. This overage would then be maxed at ​$1,400​ per child under the TCJA but is not capped under the American Rescue Plan Act temporarily for 2021.

For example, if you owed $1,000 in taxes for the tax year 2021, but had one qualifying child age 10 (Child Tax Credit of $3,000) and you qualified for the Additional Child Tax Credit, you would get $2,000 back as a refund. You would take the $3,000 credit for your child and subtract the $1,000 owed to get a total of $2,000 for a refund.