By Kristina Russo | American Express Credit Intel Freelance Contributor
5 Min Read | February 1, 2022 in Money
The child tax credit is a dollar-for-dollar reduction in your federal taxes owed, simply for raising children – whether or not they’re your kids.
Sweeping changes were enacted for 2021: The amount of the credit increased, advance payments were offered, and it became fully refundable – meaning that you may get money from the IRS even if you pay no taxes, in some situations.
It still phases out based on income, but the income levels at which it phases out were lowered.
Several states also offer versions of a child tax credit.
As a mother of teenage twins, I know how expensive it is to raise children, so I take the federal child tax credit very seriously. The child tax credit is intended to help taxpayers offset the overall cost of raising children and is a way to significantly reduce your tax bill. It is a dollar-for-dollar reduction in the tax you owe, not just a tax deduction (which lowers the income on which you’re taxed). In 2021, the child tax credit was changed significantly when the American Rescue Plan (ARP) was enacted, increasing and expanding the credit and providing advance access to cash.
But before we dive into the nitty gritty of how the 2021 child tax credit works, it’s important to note that this is NOT the same as the child and dependent CARE tax credit, which focuses on payments for childcare while you’re at work.
The child tax credit for 2021 significantly increased from $2,000 per qualifying child in previous years to $3,600 for children under age 6 and $3,000 for children 6-17 years old.1 In addition, the entire credit is now fully refundable, which means that a qualifying tax filer can get the full $3,600 “back” even if that is more than the taxes they paid. To learn about other kinds of refundable tax credits, read, “What Are Refundable Tax Credits?”
The 2021 increases are significant and add up quickly. For example, a married couple with two children under 6 years old could qualify for up to $7,200 of tax credit, compared to $4,000 in prior years.
The child tax credit is for any taxpayer who provides more than half the financial support for a child, sibling, grandchild, niece, nephew, or lawfully fostered or adopted child. You must include the child’s Social Security number when you file your return. Seven requirements must be met to be a qualifying child, according to the IRS:
If a child lived in more than one household during the tax year, it is usually the parent with primary custody who takes the tax credit. In cases of joint custody, formal arrangements should be made for when each parent can claim the credit, such as alternating years.
The unfortunately named additional child tax credit – which is NOT about an additional child – was eliminated for 2021. In past years, the additional child tax credit referred to the part of the child tax credit that was refundable, and required you to fill out an extra form. Now, the entire credit is refundable.
One of the stated goals of the ARP was to aid low- and middle-income parents who were hard hit from pandemic-era financial strain. To achieve this goal, the phase out scheme was reset to lower levels of income – meaning that taxpayers with lower income than in prior years can collect the entire credit. The 2021 child tax credit phases out in two steps, using modified adjusted gross income (MAGI) thresholds. MAGI is your adjusted gross income but with certain exclusions added back in. For a better understanding, read “What Is Adjusted Gross Income?” and “What Is Modified Adjusted Gross Income?.”
The first step reduces the tax credit from the higher amount of $3,600 or $3,000 (depending on the age of the child) down to the historical $2,000 per child. The second step further reduces the $2,000 credit down to zero. Here’s how the steps work:2
Step 1: The first step reduces the amount of the credit by $50 for every $1,000 of MAGI over $150,000 for married couples filing jointly and qualifying widow(er)s, $112,500 for heads of household and $75,000 for single or married people filing separate returns. This step accelerates the phase out of the increased tax credit for those with higher incomes.
Step 2: The second step reduces the credit further, phasing out $50 for every $1,000 of MAGI over $400,000 for married couples filing jointly and $200,000 for all other filing statuses. If you’re subject to the $200,000 threshold, the entire credit is phased out by $240,001 income. For married taxpayers filing jointly the credit is wiped out at $440,001.
As part of the ARP rules, half of the child tax credits were paid out during 2021, well before the April 2022 deadline for filing your 2021 tax return. Without any application process, the IRS made advance cash payments monthly, from July 2021 through December 2021, to get cash into the hands of eligible parents.
To do this, the IRS estimated the amount of eligible child tax credit using information from 2020 tax returns (or 2019 if 2020 wasn’t available) and then divided that amount in half. That half was divided into six equal monthly installments and paid via checks or direct deposit. For example, a family with a total estimated child tax credit of $7,200 might receive $600 per month (50% of $7,200 = $3,600/6 = $600 per month). Taxpayers could opt out of the advanced payments by unenrolling at the IRS’ Child Tax Credit Update portal – for example, if you expect your income to be higher than the phase out threshold.
The amount of these payments is not included in 2021 taxable income but will be listed on IRS Letter 6419, which eligible taxpayers should receive and use to claim the other half of the child tax credit when filing their 2021 tax returns.
Just about all the major tax preparers and filing services provide online tools to help you determine whether your dependents qualify for the child tax credit by answering a few questions. As part of your filing, they will also select the proper forms and determine how much your credit might be. If you’re a do-it-yourselfer, like my husband and me, you can use the advance child tax credit eligibility assistant and find IRS Schedule 8812 and its instructions on the IRS website.3,4
Everything I’ve discussed so far relates to your federal tax liability. Seven states offer a state-level version of the federal child tax credit, each with their own program name, formula, and eligibility requirements. They are:5
No changes have been made to the separate, pre-existing “family” tax credit for other dependents like older children, qualifying relatives, and dependents who have an Individual Taxpayer Identification Number (ITIN) rather than a Social Security number. You can’t double dip: this $500 non-refundable credit can only be used for qualifying dependents who are not eligible for the child tax credit.6
Children who qualify for the family credit must be over 17 years old and can be up to 24 for full time students and meet many of the same requirements as the child tax credit. Qualifying relatives do not need to be related to you but must live with you full time and have less than $4,300 in income, among other requirements.7 Lastly, dependents with an ITIN, like a foreign national or nonresident alien, can qualify for the family credit.
The child tax credit is a common way to reduce your overall tax bill and can even provide you with cash back. The 2021 American Rescue Plan significantly enhanced the value of this credit by increasing its amount, making it fully refundable and providing advance access to funds. Check with your own tax preparer for what the child tax credit means for you.
5 “Child Tax Credit Overview,” National Conference of State Legislatures