How does a Child Tax Credit work to reduce my taxes?

Question

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?

Answer 1

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.