The Child Tax Credit is a tax credit given to American taxpayers for each dependent child who qualifies. The American Rescue Plan Act of 2021 considerably expanded this credit, which was designed to assist taxpayers in supporting their families.
The Child Tax Credit reduces a taxpayer’s tax liability on a dollar-for-dollar basis. The American Rescue Plan raised the maximum annual credit from $2,000 per kid (under the age of 17) in 2020 to $3,000 per child (under the age of 18) or $3,600 per child (under the age of 6) in 2021, and made the 2021 credit fully refundable.
In addition, beginning in July 2021, the Internal Revenue Service (IRS) began distributing the Child Tax Credit in advance payments every month to qualifying taxpayers. Because it is fully refundable, parents don’t have to owe taxes to receive it.
Continue reading this article for in-depth information on the Child Tax Credit.
How the child tax credit works
As previously stated, the Child Tax Credit for the fiscal year 2021 is different from the credit available in 2020. The improvements prescribed under the American Rescue Plan for 2021 are only in effect for that year. With some inflation changes, the credit will revert to the rules in place for 2020 in 2022. Here’s how the differences manifest themselves.
We’ll start by looking at how the Child Tax Credit operated in 2020 because of the potential rule revert. Then we’ll look at the tax legislation for 2021 (taxpayers file for 2021 in April 2022), as well as the taxes for 2022.
In 2020
For 2020, qualified taxpayers can claim a $2,000 tax credit for each qualifying dependent kid under the age of 17. If the credit amount was greater than the amount of tax owing, the taxpayer was normally entitled to a refund of the excess credit amount up to $1,400 per qualified kid. The refundable portion of the credit, known as the Additional Child Tax Credit, was created to assist taxpayers whose tax liabilities were too low to qualify for the credit in part or in full.
A special “look-back” provision for 2020 permitted taxpayers to calculate the number of their credits based on their 2019 income. This special provision was especially crucial for taxpayers whose wages in 2019 and 2020 were deferred, affecting their eligibility for the 2020 credit.
The 2020 credit was phased down at a rate of $50 for every $1,000 (or fraction thereof) of modified adjusted gross income beyond a high-income level (MAGI). MAGI is calculated by multiplying adjusted gross income (AGI) by the number of income exclusions, deductions, and credits.
The threshold was established at $400,000 for joint returns and $200,000 for all other returns. Taxpayers eligible for the Child Tax Credit were able to change their withholding and calculate their installment tax payments to reflect the credit amounts they were entitled to.
For 2021
The credit was raised for 2021, but the qualified child’s age was 17. The credit value increased to $3,000 for children under the age of 18 and $3,600 for children under the age of six, and it became fully refundable to the extent it exceeded the taxes payable.
For each $1,000 (or portion thereof) of modified adjusted gross income beyond a MAGI threshold, the credit phase-out remained $50. For 2021, however, the MAGI threshold values for the credit phaseout have been significantly reduced.
The threshold was $150,000 for a joint return or surviving spouse, $112,500 for heads of households, and $75,000 for everyone else. In 2021, a family with an annual MAGI of $150,000 and three children aged 2, 5, and 11 will be eligible for total Child Tax Credits of $10,200, payable in $850 monthly advance installments.
A new aspect of the Child Tax Credit for 2021 is advance payments. Taxpayers may get direct payments of their Child Tax Credits in the amount of $250 or $300 per qualified child, depending on their age. Beginning in July 2021, the US Treasury will distribute payments on a monthly basis. Taxpayers could access their benefits throughout the year thanks to the advance payment programme.
Taxpayers eligible for the credit in 2021 and wish to get advance payments as soon as feasible might use an online portal to validate their bank’s direct deposit details. The 2021 direct deposit payments for taxpayers who filed 2020 tax returns were based on their 2020 income and dependent child information.
Non-filers for 2020 may be eligible for advance payments if they enroll for an online IRS portal in 2021.
Eligible taxpayers who got advance payments in the last six months of 2021 can claim the remaining annual credits on their 2021 tax returns. The advance payments are not taxable income because they represent early receipt of the tax advantages from the credits.
Suppose taxpayers received too little or too much in advance payments, the credit amount and refund—if any—will be calculated and claimed on tax returns for the 2021 year. Any shortfall in advance payments would be added to the credit available to taxpayers on their 2021 tax returns.
Generally, taxpayers who make advance payments in excess of the permitted credit must repay the excess with their tax returns. On the other hand, lower-income taxpayers will have a portion of their payback waived or reduced. Taxpayers who lived in the United States for more than half of 2021 and whose MAGI for the year fell below specific MAGI ceilings may be eligible for “repayment protection,” which means they won’t have to pay any additional taxes.
Taxpayers whose MAGI is less than $60,000 for joint returns and qualifying widows and widowers, $50,000 for heads of households and $40,000 for single filers or married persons filing separate returns are eligible for full repayment protection. Taxpayers with MAGI of $120,000 for joint returns and qualifying widows or widowers, $100,000 for heads of households, and $80,000 for single filers and married people filing separate returns are not eligible for repayment protection.
The IRS will issue taxpayers a Letter 6419 in January 2022, detailing the entire amount of advance payments they received in 2021. Taxpayers should keep this letter in their records and refer to it when submitting their tax returns for 2021.
Taxpayers who got excessive or insufficient advance payments in 2021 might adjust their payments by giving corrected and updated information—for example, a change in marital status or the number of qualifying children—via an online information portal. Taxpayers who were not required to file a tax return in 2021 but lived in the United States for more than half of the year could use the IRS Non-filer Sign-up Tool to ensure that the IRS had their information to distribute the advance credit payments. Child Tax Credits and advance payments could be factored into wage withholding. Additionally, taxpayers can choose not to receive advance payments and instead wait until they file their tax returns to claim their credit.
The IRS website has a lot of information about the Child Tax Credit in 2021, including how to qualify, calculate the amount, and deal with advance credit payment issues.
After 2021
For the years 2022 through 2025, the rules in place for 2020 will apply again, with certain inflation adjustments.
Qualifying for the child tax credit
Two qualifications must be met to claim the Child Tax Credit: The person receiving the credit must be a qualifying taxpayer, and the dependent child must also meet tax law requirements.
Qualifying taxpayer
Although most taxpayers claim the Child Tax Credit on behalf of their children or stepchildren, additional family members may be eligible if the taxpayer supplied more than half of their financial support during the tax year. If taxpayers’ siblings, grandchildren, nieces, and nephews meet the dependency, age, citizenship, and residency requirements, they may be eligible for credits. The credit is also available to adopt and foster children.
Even if the qualified child spends time in more than one household during the tax year, only one taxpayer can claim the Child Tax Credit. The tax credit is generally given to the parent who has primary custody of the child.
When the parents share custody, they must agree on when they will claim the credit—either in alternate years or according to some other formula.
The taxpayer and eligible dependent(s) must have Social Security numbers before the due date for the taxpayer’s tax return and must record them on the return, in addition to meeting the appropriate income and relationship conditions for the Child Tax Credit. Taxpayers who file false claims for Child Tax Benefits will be barred from claiming the credits for ten years. A taxpayer who is found to have filed an incorrect claim due to willful or reckless disregard of laws and regulations (but not fraud) will be denied credits for two years.
Qualifying child/dependent
A child’s eligibility for the Child Tax Credit is determined by several factors outlined in the tax code. Individuals must be US citizens, US nationals, or US resident aliens to qualify and meet the dependent, age, and residency requirements. They must also have spent more than half of the tax year with the individual claiming the credit and be reported as a dependent on that taxpayer’s return. The child must not have contributed more than half of their support during the year.
Eligible taxpayers can claim a nonrefundable tax credit of $500 for each dependent other than a qualified kid in both 2020 and 2021. The IRS provides a helpful tool to assist taxpayers in determining whether their kid or dependent is eligible for the Child Tax Credit.
Child tax credit: impact on policy and poverty
The Child Tax Credit extension for 2021 has significant policy and economic repercussions. The Child Tax Credit was designed to help low- and moderate-income families when it was first created. It has helped these taxpayers since it was enacted in 1997. The credit is gradually phased out at higher income levels. On the other hand, the Child Tax Credit has long been criticized for offering little or no assistance to the poorest families, many of whom are not taxpayers and do not submit tax returns.
The credit amount has grown over time, and reimbursements have been limited in quantity and scope; at one point, refunds were only available to taxpayers with three or more children.
High-income phaseouts continued, and credit disallowance rules addressed fraudulent, reckless, or improper claims. But, for years, the credit did not reach the poorest families.
In 2021, the significant increase in the credit amount and the provision of total refundability extended benefits to the neediest families for the first time. According to the Center on Poverty & Social Policy at Columbia University, “…the sixth Child Tax Credit payment kept 3.7 million children from poverty in December (2021). On its own, the Child Tax Credit reduced monthly child poverty by close to 30%.”
The American Rescue Plan Act, adopted to address the economic challenges caused by the COVID-19 pandemic, included an enhanced and fully refundable Child Tax Credit. It also solves several flaws present in previous versions of the Child Tax Credit.
Beyond these roots, the updated credit, with its advance-payment provision, reflects a more significant understanding of the importance and high expense of having children, as well as the role that the government may play in assisting families.
The increased credit represents a significant financial commitment. Democrats overwhelmingly supported the enhanced Child Tax Credit in Congress.
Despite their support for some additional benefits for children, Republicans opposed the adopted version of the Child Tax Credit for its high cost and absence of a job requirement. The Biden administration launched a comprehensive public education and promotion campaign to maximize the credit’s use and benefits.
What is the additional child tax credit?
The refundable element of the Child Tax Credit was known as the Additional Child Tax Credit. Families that owed the IRS less than their qualifying child tax credit amount might claim it. The additional child tax credit reimbursed the unused amount of the child tax credit to the taxpayer because the child tax credit was non-refundable. The Tax Cuts and Jobs Act repealed this provision from 2018 through 2025. (TCJA).
However, the TCJA includes some refundable credit provisions in the child tax credit.
In addition, President Biden’s American Rescue Plan was signed into law on March 11, 2021, making child tax credits completely refundable in 2021.
Understanding the additional child tax credit
A tax credit is a monetary incentive granted to eligible taxpayers to lower their tax obligations. Susan will only have to pay $3,050 if her tax bill is $5,550, and she is eligible for a $2,500 tax credit. Some tax credits are refundable, meaning the recipient will receive a refund if the tax credit exceeds the amount of tax payable. Susan will receive a cheque for $6,050 – $5,550 = $500 if her tax credit is indeed $6,050 and is refundable.
A taxpayer may be entitled to a tax credit depending on whatever tax bracket they fall into. Taxpayers with children, for example, may be eligible for the child tax credit, which helps to offset the costs of raising children.
The child tax credit allows eligible taxpayers to lower their tax liability by up to $2,000 per child for the tax years 2022-2025. The child or dependant must meet the following criteria to be eligible for the child tax credit:
- Be 16 years or younger by the end of the tax year
- Be a U.S. citizen, national, or resident alien
- Have lived with the taxpayer for more than half of the tax year
- Be claimed as a dependent on the federal tax return
- Not have provided more than half of their financial support
- Have a Social Security number
Child tax credit vs. additional child tax credit
Previously, the child tax credit was non-refundable, meaning that it might lower a taxpayer’s tax bill to zero, but any credit excess was not repaid. 38 Families who desire to maintain the unused amount of the child tax credit might apply for the additional child tax credit, which is another possible tax credit.
This was a refundable tax credit available to families that were already eligible for the non-refundable child tax credit. Families that owned less than the child tax credit and desired a refund for the excess credit benefited from the supplementary child tax credit.
While the additional child tax credit was repealed by the Tax Cuts and Jobs Act (TCJA) in 2018, up to $1,400 of the $2,000 child tax credit can be refunded provided that certain conditions are met for each qualifying child. To be eligible for a refund, a taxpayer must earn more than $2,500 during the tax year. 10 Filers must complete Schedule 8812 to receive a refund.
For 2021, the American Rescue Plan made significant adjustments to the child tax credit.
The maximum credit has increased to $3,000 for minors under 17 and $3,600 for adults (children younger than six). In July 2021, qualifying families began receiving monthly checks (half of the maximum credit).
Families can claim the second half of the credit on their 2021 tax return, as the benefit became fully refundable in 2021. Individual filers with children earning more than $75,000 and joint filers with children earning more than $150,000 will see this child-related tax benefit fade out.
Is the tax credit for 2021 the same as the 2020 credit?
No. Despite certain similarities, the child tax credit in 2021 differs dramatically from the allowance in 2020. For starters, the credit will increase from $2,000 for children under the age of 17 in 2020 to $3,600 for children under six and $3,000 for children aged 6 to 17 in 2021. The credit was also distributed in monthly advance cash payments commencing in July 2021. The credit for 2020 was only partially refundable; however, the credit for 2021 is refundable. The credit for 2021 is geared primarily toward low- and middle-income taxpayers.
Are the child tax credit advance payments treated as taxable income for 2021?
Advance payments are not considered taxable income. In 2021, half of the total credit was paid in advance monthly installments, and the other half was claimed when you filed your 2021 income tax return.
How do the monthly advance payments of the child tax credit affect the credit on the tax return for 20 21?
The IRS calculated the advance payments using the number of dependent children indicated on a taxpayer’s previous-year return. The overall payout amount for 2021 may be more significant or less than the actual credit if taxpayers claim more or fewer qualifying children. If the advance payments are less than a taxpayer’s whole year child tax credit, which is the case for most taxpayers, the remaining undistributed credit balance can be claimed on their 2021 tax return.
If taxpayers’ overall credit for the year exceeds their advance payments, they may be compelled to reimburse the difference upon completing their return. Low-income taxpayers will have their repayments excused, as will small-dollar repayments.
Conclusion
For households with children, the Child Tax Credit is a near-universal benefit. Millions of youngsters are lifted out of poverty each year due to it. It has been proven that increasing money for low- and middle-income families improves their health. It is vital to ensure that very low-income families receive the Child Tax Credit in order to keep the most significant number of children out of poverty. It should also be considered to better connect the credit with the person with whom the children live each month.
