You've Been Warned: These Child Tax Credit Mistakes That Could Stop Your Refund

The Child Tax Credit (CTC) can give you up to $2,000 for each qualified child, and help to lower your tax bill or increase your refund. In 2021, under the American Rescue Plan, this credit was temporarily increased to $3,600 for children under 6 and $3,000 for older children. Getting either will be a relief when you consider the surprising cost of raising a child in the United States. Still, filing for the Child Tax Credit follows certain processes and any error could delay refunds, plunging you into months of back and forth correspondence with the IRS, just to resolve these disputes.

Errors can range from discrepancy in the Social Security numbers or that dependent details do not align with IRS records. In severe cases, incorrect claims may lead to penalties or require amended returns. To be safe, look up the IRS Interactive Tax Assistant tool to check if you or your dependents qualify to receive the credits. Also, double-check SSNs and custody agreements before filing, keep records of residency (school documents, medical records etc.) to substantiate claims, or consult a tax advisor if reconciling advance payments feels overwhelming. That's said, these child tax credit mistakes could stop your refund.

Claiming the Child Tax Credit is largely dependent on providing a valid Social Security Number (SSN) for the child who is listed on your tax return. The IRS explicitly rejects any CTC claims without this identifier, as it verifies the child's citizenship, age, and residency. While this rule may seem straightforward, timing is an issue for most parents, especially those with newborn babies or adopted children. Applying for your child's SSN is best done after childbirth, because hospitals can help new parents submit all required paperwork to the Social Security Administration (SSA). However, delays can occur due to administrative backlogs, mailing errors, incomplete forms, or the SSA processing time of two to four weeks.

Parents who prefer not to wait usually file their taxes before their child's SSN is ready. Yet, in most cases, their claims are automatically rejected, even when they provide other requirements. Besides, rushing to file for CTC before receiving the number can force you into lengthy corrections, as the IRS may disallow the credit and, instead, request recalculation of refunds, causing delay by months. If you're waiting for an SSN, first file for an extension, using IRS Form 4868. There's no risk of a penalty, provided you don't owe any outstanding taxes. Once the SSN arrives, you can amend the details or file again.

The value of the Child Tax Credit depends on your adjusted gross income (AGI), which is what determines the amount of credit you are entitled to. The credit limit phases out any filer who is single and also earns above $200,000. Meanwhile, the threshold for joint filers is an income of over $400,000. You can also run into issues if you fail to include all income sources in your form or neglect to indicate student loan interest payments or IRA contributions that can raise your AGI, and jeopardize your eligibility status.

Verification is non-negotiable. You can always cross-reference your AGI against W-2s, 1099s, and IRS transcripts before filing. For self-employed individuals or those with complex finances, the IRS's Income Verification Express Service can clarify how to do this. If your income fluctuated midyear, say due to a job change or bonus, you can use the IRS's Tax Withholding Estimator to avoid underpayment penalties. The CTC as of 2024, is refundable up to $1,700 but in order to qualify, your AGI is expected to stay below the threshold.

The IRS sets strict criteria for who counts as a "qualifying child" for the Child Tax Credit. To qualify, a child must meet four requirements – age, relationship, residency, and support. They must be under 17 at year's end, live with you for over half the year, and rely on you for more than half their financial support. They must also be your biological child, stepchild, sibling, or a descendant of any of these (e.g. grandchild). Real-world mistakes often blur these lines and shared custody arrangements also create confusion. Yet, if a child splits time between homes, only the parent who houses them for 183+ nights can claim the credit.

It is not allowed for two persons to file independent claims on the same child since it can trigger IRS audits (see what happens when you get audited), but some divorced parents fall victim to this mistake. There are others who incorrectly assume that foster children automatically qualify for these credits, even without meeting the required criteria. In such cases, the IRS requires documentation like school records, medical bills, or custody agreements to prove the child's eligibility. To avoid errors, ensure to also provide any proof of residency — lease agreements, utility bills and bank statements — or any other valid receipt. If unsure of what to provide, consult a tax professional or reference the IRS's qualifying child guidelines.

Advance Child Tax Credit payments, distributed in 2021 under the American Rescue Plan, require taxpayers to reconcile these prepayments when filing their annual returns. The IRS issued Letter 6419 to recipients, detailing total advance payments received per child, so failure to match these amounts on your tax return creates room for errors.

Let's say you received $2,500 as your credit, but you enter $3,000 in your form, this could lead to the IRS paying you a lesser amount than you are supposed to receive. If your income or your dependents' eligibility changed midyear, a child turned 17 or custody arrangements shifted, your advance payments might exceed what you're owed, requiring repayment. To reconcile this, subtract advance payments from your total CTC entitlement.

You can dispute an overpayment but the end result could be a refund. For an underpayment, you will claim the difference. Other pitfalls include assuming advances auto-adjust for life changes or ignoring IRS correspondence. Taxpayers who moved or updated bank accounts late in the year might miss critical notices that can result in miscommunication. If you discover an error post-filing, amend your return using Form 1040-X and attach documentation like custody agreements or proof of income.