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Let's say I make 100K a year from my business and I have 3 kids under 9 years old. I read that each child can give me $2000 child tax credit.

So if my 100K business income is taxed and say its 40%:

100K x 40% (40K) = 60K take home

Does the child tax credit apply to the 100K first making it:

100K - 3 Kids (6K) = 94K income x 40% (37.6K) = 62.4K take home

OR is it:

100K x 40% (40K) = 60K + 6K child credit = 66K take home?

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  • Your federal income tax is never as much as 40%, and CTC (and ACTC) applies only to federal income tax. If you don't have significant other income your total (not marginal) federal tax will be around 20%, depending on other factors you didn't state. Yes you have self-employment tax (slightly less than 15.3%) on your Schedule C net income up to a limit ($132,900 for 2019, $137,700 for 2020) and 2.9% after that, and there are no deductions or credits on SE. You usually have state income tax also, and any provision in the state tax for children depends on the state.
    – dave_thompson_085
    Commented Mar 6, 2020 at 4:51
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    @dave_thompson_085 who knows income tax isn't 40%. "say its 40%". He was just using it to make the maths easy. Also the rest of your comment should be in an answer so that it can be up and down voted.
    – Sam Dean
    Commented Mar 6, 2020 at 11:25
  • @SamDean Federal Income Tax != Income Tax in general.
    – ave
    Commented Mar 6, 2020 at 12:35
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    I have edited out your unrelated query about a self-employment tax credit, as we like to have only one question per post. If you have a question about self-employment taxes or credits, please start a new question.
    – Ben Miller
    Commented Mar 6, 2020 at 13:18
  • @dave_thompson_085 - Your comment has been flagged. It's "too good to be just a comment"! Do you mind posting this as an answer?
    – JTP - Apologise to Monica ♦
    Commented Mar 6, 2020 at 18:23

1 Answer 1

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There are two types of items that reduce your income tax: deductions and tax credits.

With a deduction, you subtract the deduction from your income before the tax is calculated. The benefit to you with a deduction is dependent on your tax rate. So if you are in the 22% tax bracket, a $6000 deduction would ultimately be worth $1320 to you.

With a tax credit, the tax is calculated first and then the tax credit is subtracted from your tax due. The tax credit is worth the full amount to you, because it directly reduces your tax bill.

Because the Child Tax Credit is a tax credit (not a deduction), a $6000 credit is worth the full $6000 to your situation.

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    Credits are further divided into nonrefundable (you get reduced value if the credit amount would exceed your tax) and refundable (you get full value even if it results in negative tax). CTC itself is nonrefundable, but if it is limited you can get part of the 'lost' value as Additional CTC (ACTC) which is refundable. OP's tax is probably well over $6k so this complication can be ignored here.
    – dave_thompson_085
    Commented Mar 6, 2020 at 4:50
  • @dave_thompson_085 - a great point. Sure, OP is probably well over, but other members reading this will be helped. Ben might want to edit that in to the main answer text.
    – JTP - Apologise to Monica ♦
    Commented Mar 6, 2020 at 10:38
  • @dave_thompson_085 Yes, and deductions are also further divided (above-the-line, itemized, limited, threshold, etc.)
    – Ben Miller
    Commented Mar 6, 2020 at 13:08

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