Your Guide to the Child Tax Credit
“Having kids—the responsibility of rearing good, kind, ethical, responsible human beings—is the biggest job anyone can embark on.”
— Maria Shriver
Designed by the Federal government, the Child Tax Credit looks to support those American taxpayers who face financially difficult times and have dependent children. However, the plan not only helps the parents but also offers support for small businesses that benefit from these credit expansions.
Introduced in 1997, American Rescue Plan Act extended the plan in early 2021 to provide the necessary funds to families. Since July 2021, parents with children under the age of 18 who have an income below a certain level will receive money for each child they have. From then on they will get the same amounts at the same time every month.
This article presents a piece of comprehensive information on the Child Tax Credit along with the following points:
- What’s a Tax Credit?
- What is the Child Tax Credit?
- How does the Child Tax Credit Work?
- Requirements for the new Child Care Tax Credit
- What is the Additional Child Tax Credit and how can I claim it?
- Commonly asked questions about the Child Tax Credit
What’s a Tax Credit?
Tax credits are tax incentives that allow certain taxpayers to deduct the amount of accrued credit from what they owe the state. Tax credits help lower your owed amount of taxes. You can arrive at your tax credit amount by deducting the credit amount from your tax liability.
There are times when you may have a refundable tax credit. This happens when your credit amount exceeds the taxes you owe. In such a case, you shall receive the difference between the two amounts. As an example, if you owe $2000 in federal taxes, but are eligible for a $2,000 tax credit, your net tax liability is zero.
Fundamentally, there are 3 types of tax credits: non-refundable, refundable, and partially refundable. During the 2020 tax year, the Child Tax Credit was partially refundable and fully refundable in 2021.
What is the Child Tax Credit?
The Child Tax Credit is a tax benefit that all American taxpayers receive for each qualifying dependent child. Millions of American parents have benefitted from the Child Tax Credit since the late 1990s. For every qualifying dependent child, the credit lowers a taxpayer's tax liability dollar-for-dollar.
Let's take a quick look at the varying values of Child Tax Credit for the years 2020 and 2021.
2020 Taxes
According to the tax law for 2020, parents who have children under 17 were eligible for a credit of up to $2,000 per child against income tax.
2021 Taxes
In 2021, American taxpayers could receive a credit of $3,000 for children under 18 or $3,600 for children under 6. These credits were fully refundable and were payable monthly.
Legislation to extend the enhanced credit for 2022 was not passed. As a result, the credit will return to $2,000 and will be partially refundable on an annual basis for the tax year 2022.
How does the Child Tax Credit Work?
For the 2020 tax year, the Child Tax Credit differs from the one for 2021. American Rescue Plan changes for 2021 are just for that year. As of 2022, the credit will be reverted to the rules in effect for 2020, with some inflation adjustments.
Let's see how they differ.
In 2020
- Taxpayers who have an eligible dependent child under age 17 could claim a tax credit of $2,000 for 2020
- Generally, if a taxpayer's tax refund exceeded the amount of the credit, the excess credit amount was refundable up to $1,400 per qualifying child
- In addition to the refundable portion of the credit, there is the Additional Child Tax Credit, designed to help taxpayers whose tax liabilities are low to the extent that they cannot utilize the entire credit
- Taxpayers were able to determine their 2020 credits by using their 2019 income under special rules
- After a threshold of Modified Adjusted Gross Income or MAGI of $20,000, the 2020 credit phased out at a rate of $50 for each $1,000 above that threshold
- MAGI is defined as adjusted gross income (AGI) increased by the number of certain income exclusions, deductions, and credits
For joint returns, a threshold of $400,000 was set, and for others, $200,000 was set. Those who had been eligible for the Child Tax Credit were allowed to adjust their income tax withholding and/or calculate their installment tax payments so that their credit amounts were reflected.
For 2021
- For 2021, the credit was increased and the age for a qualifying child was raised to those under 18
- The credits were made fully refundable to the extent of exceeding the owed taxes
- Credit amounts increased to $3,000 for children younger than 18 years of age or $3,600 for children younger than 6 years
- Generally, the phaseout amount was $50 for every $1,000 of modified adjusted gross income above a MAGI threshold. The MAGI thresholds for the credit phaseout were reduced significantly for 2021
- Joint returns or surviving spouses must meet the threshold of $150,000; heads of households must meet the threshold of $112,500 and everyone else must meet the $75,000
Thus, in 2021, a family making $150,000 a year with three children ages under the age of 18 is entitled to receive a total of $10,200 in Child Tax Credits, payable in advance at a rate of $850 a month.
How do Child Tax Credits Playout After 2021
There are likely going to be some inflation adjustments. Besides these adjustments, the rules in the plan will be effective the way they were in 2020. This is set to be in effect from 2020 to 2025.
Requirements for the new Child Care Tax Credit
The Child Care Tax Credit requires two qualifications that the dependent must fulfill:
- The child must be 12 years of age or younger at the time the childcare is provided or their spouse, parent, or other dependent must be physically or mentally incapable of caring for themselves
- and live with the receiver for a period of at least six months out of the year
Note: A taxpayer cannot claim the credit for payments made to their spouse, a parent of the child, a child who is 18 or older, or a dependent listed on their tax return. For avoiding this, filers need to furnish their care provider's name, address, and Taxpayer Identification Number or TIN.
How do I claim an Additional Child Tax Credit?
ACTC or Additional Child Tax Credit is a refundable credit that parents receive when their Child Tax Credit exceeds their income taxes owed, if they earned at least $2,500 in the year. The ACTC was valued at up to $1,400 for 2018 - 2021 returns. To aid families who have tax liabilities too low to fully benefit from the Child Tax Credit, the Additional Child Tax Credit (ACTC) was established.
The CTC requires taxpayers to satisfy one of the two conditions here:
- For the tax year, you earned $2,500 or more
- if you have three or more qualifying children
The instructions for Form 1040 include a worksheet to determine your child's tax credit eligibility. You can fill it out if you are unsure.
To receive the credit, individuals must complete Schedule 8812 and include it with their federal income tax return.
Commonly asked questions about the Child Tax Credit
Let’s list down some of the most frequently asked questions:
Q: If you claim a child on taxes in 2022, how much will you get?
A: The bill extending the enhanced credit amount and advance payment structure has not passed. As of now, the child tax credit will revert to its original maximum of $2,000 per qualifying dependent for the 2022 tax year.
Q: What is the age at which the child tax credit ends?
A: As only a family with a child under the age of 17 can take advantage of the child tax credit, your child will not be eligible for a child tax credit if the child is 18 or will turn 18 before the end of the year.
Q: What action do I need to take to access the Child Tax Credit payments?
A: You do not have to take any action. The IRS will use the information you filled in while filing your taxes and will have your tax credit payments into your bank account. You may also receive it through a check.
Q: Is it possible to update my direct deposit information or my family information with the IRS?
A: IRS usually utilizes your information from your previous tax return and doesn’t yet have a system in place to allow people to update any information. While this may change in the future, there is no provision yet for the process.
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Key Takeaways
Here are the key takeaways:
- Introduced in 1997, American Rescue Plan Act extended the plan in early 2021 to provide the necessary funds to families
- Since July 2021, parents with children under the age of 18 who have an income below a certain level will receive money for each child they have
- Tax credits are tax incentives that allow certain taxpayers to deduct the amount of credit that they have accrued from what they owe the state. Tax credits help lower your owed amount of taxes
- There are 3 types of tax credits: non-refundable, refundable, and partially refundable
- The Child Tax Credit is a tax benefit that all American taxpayers receive for each qualifying dependent child
- For every qualifying dependent child, the credit lowers a taxpayer's tax liability dollar-for-dollar
- According to the tax law for 2020, parents who have children under 17 were eligible for a credit of up to $2,000 per child against income tax
- In 2021, American taxpayers could receive a credit of $3,000 (children under 18) or $3,600 (children under 6). Credits were fully refundable and were payable monthly
- A taxpayer cannot claim the credit for payments made to their spouse, a parent of the child, a child who is 18 or older, or a dependent listed on their tax return
- ACTC is a refundable credit that parents receive if their Child Tax Credit exceeds their income taxes owed, if they earned at least $2,500 in the year
- The ACTC was valued at up to $1,400 for 2018 - 2021 returns
- the child tax credit will revert to its original maximum of $2,000 per qualifying dependent for the 2022 tax year