What Is the Child Tax Credit ?
The Child Tax Credit is a tax benefit granted to american taxpayers for each qualifying dependent child. Designed to help taxpayers support their families, this citation was greatly expanded for 2021 taxes by the american english Rescue Plan Act of 2021 .
The Child Tax Credit decreases taxpayers ’ tax liability on a dollar-for-dollar basis. The american english Rescue plan increased the maximal annual credit from $ 2,000 per child ( under long time 17 ) in 2020 to $ 3,000 per child ( under old age 18 ) or $ 3,600 ( children younger than 6 ) for 2021 and made the 2021 credit rating in full refundable.
Reading: Child Tax Credit
In addition, beginning in July 2021, the Internal Revenue Service ( IRS ) distributed the Child Tax Credit to eligible taxpayers in advance payments on a monthly footing. Because it is fully refundable, parents don ’ t have to owe taxes to receive it .
- For 2020 taxes, the tax law allowed a credit against income tax of up to $2,000 per eligible child (under age 17) that was partially refundable for some taxpayers.
- For 2021 taxes, the credit was $3,000 (children under age 18) or $3,600 (children under age 6) per eligible child for American taxpayers—it was fully refundable and could be received in monthly advance payments.
- Legislation to extend the increased credit for 2022 was not passed—thus, the credit will revert back to $2,000 and be partially refundable on an annual basis for tax year 2022.
How the Child Tax Credit Works
As noted above, the Child Tax Credit for the 2021 tax class differs from the credit allowed in 2020. The 2021 changes, mandated by the american english Rescue plan, are equitable for 2021. For 2022, the accredit will revert to the rules in effect for 2020, with some inflation adjustments. here ’ s how the differences play out .
Because of the possible rules reversion, we ’ ll beginning by reviewing how the Child Tax Credit worked in 2020. then we ’ ll spirit at 2021 tax laws ( taxpayers file for 2021 in April 2022 ) and ahead to 2022 taxes .
IRS Letter 6419
In Jan. 2022, the IRS will send Letter 6419 to inform taxpayers of the total sum of promote payments of Child Tax Credits distributed to them in 2021—information that they will need for their 2021 tax returns .
For 2020, eligible taxpayers could claim a tax credit of $ 2,000 per qualifying dependent child under historic period 17. If the total of the credit exceeded the tax owed, then the taxpayer broadly was entitled to a refund of the surfeit credit measure up to $ 1,400 per qualifying child. The refundable share of the credit—i.e., the extra Child Tax Credit —was designed to help taxpayers whose tax liabilities were excessively broken to benefit from separate or all of the credit .
For 2020, a special “ look-back ” rule allowed taxpayers to determine the measure of their credits on the footing of their 2019 income. This extra provision was particularly important for taxpayers whose remainder in earnings from 2019 to 2020 affected their eligibility for 2020 credit .
The 2020 credit was subject to a phaseout at the rate of $ 50 for each extra $ 1,000 ( or fraction thence ) above a high-income doorway of modified adjusted gross income ( MAGI ). MAGI is defined as adjusted arrant income ( AGI ) increased by the measure of certain income exclusions, deductions, and credits .
The doorway level was set at $ 400,000 for a joint return and $ 200,000 in other cases. Taxpayers entitled to claim the Child Tax Credit were permitted to adjust their income tax withholding and/or calculate their episode tax payments to reflect their allowed credit amounts .
For 2021, the credit increased and the age for a qualifying child extended to those under 18. The accredit amount rose to $ 3,000 ( children under age 18 ) or $ 3,600 ( children younger than 6 ) and became amply refundable to the extent that it exceeded the taxes owed .
The recognition phaseout broadly remained $ 50 for each $ 1,000 ( or fraction thence ) of modified adjusted gross income above a MAGI threshold. however, the MAGI doorway amounts for the credit phaseout were substantially reduced for 2021 .
For a joint return or surviving spouse, the threshold was $ 150,000 ; for heads of households, $ 112,500 ; and for all others, $ 75,000. thus, in 2021, a family with annual MAGI of $ 150,000 and three children, ages 2, 5, and 11, is entitled to total Child Tax Credits of $ 10,200, collectible in promote payments of $ 850 per calendar month .
Advance payments: The Child Tax Credit for 2021 introduced a new feature : advance payments. Taxpayers could receive send improvement payments of their Child Tax Credits, in amounts of $ 250 or $ 300 per qualifying child depending on senesce. The U.S. Treasury distributed payments on a monthly basis begin in July 2021. The advance payment platform enabled taxpayers to use their benefits during the year .
Taxpayers who were entitled to the credit for 2021 and wanted to receive promote payments ampere early as possible could confirm the direct deposit information for their bank through an on-line portal vein. For taxpayers who filed 2020 tax returns, the 2021 aim deposit payments were based on their 2020 income and information about subject children. Non-filers for 2020 could receive the gain payments by registering in 2021 on an on-line IRS portal .
eligible taxpayers who received advance payments for the final six months of 2021 are entitled to claim the balance wheel of their annual credits on their 2021 tax returns. Because the improvement payments represent early reception of the tax benefits from the credits, the advance payments are not taxable income .
Underpayments or overpayments: If taxpayers received excessively short or besides a lot in improvement payments, then these will be reconciled, with the credit amount and refund—if any—claimed on tax returns for the 2021 class. Any deficit in advance payments would add to the credit allowed on taxpayers ’ 2021 tax returns .
Taxpayers whose advance payments exceed the permissible credit broadly must pay back the excess with their tax returns. however, for lower-income taxpayers, a “ condom harbor come ” of their repayment will be waived or reduced. Taxpayers who were U.S. residents for more than half of 2021 and whose MAGI for 2021 fell below specified MAGI ceilings can qualify for “ refund security ” and will not be required to repay any overindulgence .
The full refund protection applies for taxpayers whose MAGI is not more than the be : $ 60,000 for joint returns and qualifying widows and widowers, $ 50,000 for heads of households, and $ 40,000 for unmarried filers or married individuals filing separate returns. No repayment auspices is available for taxpayers with MAGI of $ 120,000 for joint returns and qualifying widows or widowers, $ 100,000 for heads of households, and $ 80,000 for one filers and marital people filing offprint returns .
In Jan. 2022, the IRS will send taxpayers a Letter 6419 reporting the full measure of advance payments received by them in 2021. Taxpayers should refer to this letter when preparing their tax returns for 2021 and retain it in their tax records .
Online help: During 2021, taxpayers who received advance payments that are excessive or excessively low were able to have their payments adjusted by providing corrected and updated information—e.g., change in marital status or number of qualified children—through an on-line information portal site. Taxpayers who weren ’ t required to file a tax return in 2021 and had a main home in the United States for more than half of 2021 could use the IRS Non-filer Sign-up Tool to be sure that the IRS had their data for sending the improvement credit payments. Wage withholding could be adjusted to reflect Child Tax Credits and progress payments. besides, taxpayers could elect not to receive progress payments and expect until filing their tax returns to claim their credit sum.
The IRS web site provides extensive information about the 2021 rules for qualifying for the Child Tax Credit, calculating its measure, and dealing with advance recognition payment issues.
The rules in effect for 2020 will again become effective, with some inflation adjustments, for 2022 through 2025 .
Qualifying for the Child Tax Credit
To claim the Child Tax Credit, two qualifications must be met : The person receiving the credit must be a qualifying taxpayer, and the dependant child besides must meet tax law requirements .
Although most taxpayers qualify for the Child Tax Credit by claiming credits with respect to their children or stepchild, other family members besides may qualify if the taxpayer provided more than half of their fiscal support during the tax year. A taxpayer may be entitled to credits with respect to siblings, grandchildren, nieces, and nephews if they meet the colony, historic period, citizenship, and residency requirements. Adopted and foster children besides can qualify for the citation .
merely one taxpayer can claim the Child Tax Credit, even if the qualifying child divides time between more than one family during the tax year. If one rear had primary detention of the child, that rear normally receives the tax credit. In cases of joint hands, the parents must reach an agreement about when each will claim the credit—in alternate years or according to some other formula .
In summation to meeting the applicable income and relationship qualifications for the Child Tax Credit, the taxpayer and qualifying dependent ( s ) must have Social Security numbers before the due date for the taxpayer ’ s tax return and must report them on the hark back. Taxpayers who make deceitful claims for Child Tax Credits will be ineligible to claim such credits for 10 years. A taxpayer who is determined to have made an improper claim due to reckless or designed dismiss of rules and regulations ( but not fraud ) will be denied credits for two years .
The tax law prescribes respective factors that determine a child ’ s eligibility for the Child Tax Credit. To qualify, individuals must be U.S. citizens, U.S. nationals, or U.S. house physician aliens and must meet the colony, age, and residency requirements. They besides must have lived with the person who is claiming the tax recognition for more than half of the tax year and must be claimed as a dependent on that taxpayer ’ mho revert. The child must not have provided more than half of their own support during the year .
For both 2020 and 2021, eligible taxpayers can claim a nonrefundable tax credit of $ 500 for each dependent early than a passing child .
The IRS offers a utilitarian tool to help taxpayers figure out if their child or dependent qualifies for the Child Tax Credit .
Child Tax Credit : impact on policy and poverty
The expansion of the Child Tax Credit for 2021 has significant policy and economic implications. When the Child Tax Credit was first enacted, it was intended to benefit low- and moderate-income families. Since its act in 1997, it has benefited these taxpayers. At higher income levels, the credit is phased out gradually. however, the Child Tax Credit had been criticized regularly for providing little or no benefit to the poorest families, many of whom are not taxpayers and do not file tax returns .
Over the years, frequent amendments increased the credit sum and provided refunds that were limited in measure and oscilloscope ; at one clock time, refunds were restricted to taxpayers with three or more children. High-income phaseouts continued, and citation disallowance rules addressed deceitful, heedless, or improper claims. But, for years, the credit did not reach the poorest families .
In 2021, for the first clock time, the meaning addition in the credit come and the provision of sum refundability extended benefits to the neediest families. 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 expanded and in full refundable Child Tax Credit was enacted as separate of the American Rescue Plan Act, a jurisprudence formally targeted at relieving the economic problems created by the COVID-19 pandemic. It besides addresses many limitations considered debatable in the earlier versions of the Child Tax Credit .
Beyond these origins, the revised recognition with its advance-payment feature represents a broader recognition of the importance and the solid cost of raising children and of the function that government can play in supporting families .
The enlarged credit constitutes an enormous fiscal commitment. congressional Democrats strongly supported the increased Child Tax Credit. Although Republicans generally favored some expanded benefits for children, they criticized the translation of the Child Tax Credit that was enacted for its monetary value and for the lack of any work necessity. The Biden administration undertook an extensive public educational and promotional program to maximize the citation ’ second use and benefits.
Is the Tax Credit for 2021 the Same as the 2020 Credit?
No. Although there are some similarities, the 2021 child tax credit differs significantly from the 2020 allowance. First, the citation increases from $ 2,000 for children under senesce 17 in 2020 to $ 3,600 for each child under 6 years and $ 3,000 for each child age 6 up to historic period 17 for 2021. besides, beginning in July 2021, the credit was distributed in monthly progress cash payments. The 2020 recognition was only partially refundable, the 2021 credit is amply refundable. The 2021 credit targets more to benefit low- and middle-income taxpayers .
Are the Advance Payments of the Child Tax Credit Treated as Taxable Income for 2021?
No. The promote payments are not treated as taxable income. Half the total citation amount was paid in advance monthly payments in 2021 and you claim the other half when you file your 2021 income tax reelect.
How Do the Monthly Advance Payments of the Child Tax Credit Affect the Credit on the Tax Return for 2021?
The IRS estimated the promote payments based on the number of dependent children reported on a taxpayer ’ randomness anterior class tax return. If taxpayers claim more or fewer eligible children for 2021, the total requital measure may be more or less than their actual credit. If, as will be the case for most taxpayers, the advance payments constitute less than a taxpayer ’ sulfur entire annual child tax credit rating, the taxpayer can claim the remaining undistributed credit libra on their 2021 tax revert. If a taxpayer received advance payments that exceeded their sum citation for the year, they may be required to repay the excess when filing their reelect. however, repayments for low-income taxpayers and repayments of small amounts generally will be waived .