Refundable Child Tax Credit
A taxpayer, who is unable to claim the full amount of the child tax credit because income tax liability is less than the credit amount, is allowed to take up to $1,400 of the tax credit as a refundable credit, referred to as the additional child tax credit. Form 8812 is used to claim the refundable child tax credit. The combined non-refundable and refundable credits can’t exceed the credit as computed after taking into account the adjustment for the modified AGI limitation. The $1,400 amount is inflation-indexed in $100 increments after 2018. The first inflation adjustment applies to 2022 where the refundable amount increases $1,500; the 2023 amount is $1,600 and the 2024 and 2025 amounts are $1,700. (IRC Sec. 24(h)(5))
The amount of the refundable credit is based on an earned income computation. Taxpayers with 3 or more qualifying children also take into consideration the amount of Social Security and Medicare taxes they paid. Further, the additional child tax credit for these taxpayers will be limited by any earned income credit claimed by the taxpayer.
Combat Pay
Excluded combat zone pay of military taxpayers is treated as earned income for this computation.
Taxpayers With 1 or 2 Qualifying Children
The refundable child tax credit is the lesser of the balance of the child credit the taxpayer is otherwise entitled to or a percentage of taxable earned income (defined the same as for the earned income credit) in excess of a threshold amount. (IRC Sec 24(h)(6))
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The threshold amount is: $2,500
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The percentage amount is: 15%
Example – Refundable Child Credit – Bob and Sara Scott file a married joint return for 2024 and claim their 9-year-old son as a dependent. The Scotts’ AGI of $30,800 consists solely of Bob’s wages (no modifications). Their income tax is $210 and child credit is $2,000. The first $210 of the credit is used to offset the tax to zero. The balance, $1,790 is greater than the maximum allowed of $1,700, so their refundable credit is limited to $1,700; it is less than the result using the earned income formula ((30,800 – 2,500) x 15% = $4,245).
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If, instead of $30,800 of wages, the Scotts’ only income had been $30,800 of interest from investments, none of the child credit would be refundable. It would be limited to $210, the amount of their tax.
Taxpayers With 3 or More Qualifying Children
The refundable child credit for a taxpayer with 3 or more qualifying children is limited to: the lesser of (a) the balance of the child credit the taxpayer is unable to claim as a non-refundable credit or (b) the greater of:
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The earned income computation as explained above for taxpayers with fewer than 3 qualifying children, or
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The excess of the taxpayer’s Social Security and Medicare taxes (including an amount equal to the above-the-line deduction of self-employment tax paid) over any earned income credit allowed.
Example (6.2% FICA Rate)– Refundable Child Credit, 3 or More Children: Rita has 3 qualifying children, wages of $50,020, $200 of interest income, and a total tax liability of $3,506. She was not eligible for any earned income credit. Rita paid $3,827 of Social Security and Medicare taxes. Her child credit based on 3 children x $2,000 would be $6,000 (no phase out for modified AGI required), but the non-refundable credit is limited to her tax liability of $3,506. Rita can claim an additional, refundable, child credit of $2,494. It is the lesser of the credit she wasn’t otherwise able to claim ($6,000 - $3,506 = $2,494) or the greater of her Social Security/Medicare taxes over EIC ($3,827 – $0 = $3,827) or her earned income in excess of $2,500 times 15% ($50,020 - $2,500 = $47,520 x 15% = $7,128). The $2,494 is also less than the refundable maximum of $1,500 per child (3 x $1,500 = $4,500).
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