To recap the child tax credit can only be credited up to the amount of ordinary income tax assessed and it is NON-REFUNDABLE. Since the Additional Child Tax Credit is refundable it is credited after all other taxes have been calculated, including the self-employment tax.
Here's where it gets a bit complicated. The amount of the additional child tax credit is dependent upon several factors:
-was any portion of the child tax credit used?
-are any other taxes being assessed (i.e. self-employment, individual responsibility (Healthcare penalty),
early retirement plan distribution penalty etc.
-any other taxes credits or federal income taxes withheld (from paychecks)
Depending on the above you may receive all, some or none of the additional child tax credit. Here's what that scenario might look like in simplified terms:
Ordinary Income Tax -$250
Child Tax Credit +$250
Self Employment Tax -$500
Health Ins. Penalty -$100
Federal Tax Withheld +$450
Additional CTC +$750
Federal Refund **$600**
Since $250 of the child tax credit has already been used we only have $750 left to be credited. However, there is federal income tax withheld that will be applied to both the self employment tax and the health insurance penalty before the Additional Child Tax Credit. And because the federal income tax is applied first you receive the larger benefit of the refundable amount of the Additional CTC.
It's a lot to think about and be aware of but that's why tax preparers exist! And quite honestly if you're preparer is using any decent professional software the child tax credit and the additional CTC should be automatically calculated once the dependent and income information is complete entered into the return.
That's it for the Child Tax Credit. Next week, we'll learn about Education Credits!