Child Tax Credit Basics
Child tax credit helps families raise young children by reducing their tax liability and granting them some financial relief.
The American Rescue Plan Act 2021, introduced in March as a COVID stimulus package, increased some of these benefits for 2021 only. An addition to this Act was the introduction of monthly advance payments for families who want to get their tax credit benefits early.
So how exactly does child tax credit work, and who is eligible for it? Here, we will talk about the basics of the child tax credit.
The child tax credit is refundable tax credit families can get per child, depending on how old their children are. Child tax credit offers relief to families with low income by reducing their tax liability, as long as their children are 17 years old or younger.
If the tax credit amount exceeds the actual tax owed, the families may receive a refund. The child tax credit provided in 2020 was lower than that in 2021. In 2022, the amount in 2020 will come into effect again.
Those taxpayers who qualify for tax credit will have the credit subtracted from the total tax they owe. This helps them cover the cost of raising their children. The child tax credit has successfully reduced poverty since its enactment, as well.
Who is Eligible for Child Tax Credit?
Families with dependent children who are U.S citizens are eligible for the child tax credit. The phase-out of the child tax credit depends on the amount of gross income the family has.
The income requirements are:
- $75,000 for single filers
- $150,000 for married joint filers
- $112,500 for head of household filers
Apart from that, the IRS maintains that you must have supported the child in the past year, and the child must have lived with you for half a year, as well. The child needs to be 17 or younger on December 31st of 2021, and they may not file a joint tax return.
In 2022, the eligibility requirements will go back to $200,000 for single filers and $400,000 for married people.
How Much Child Tax Credit Can You Get?
In 2021, you can get $3,000 of child tax credit per child. This can go up to $3,600 if your child is under 6 on December 31st. The tax credit reduces your tax bill per dollar. It can both reduce your tax bill to zero and grant you a tax refund.
Families may receive advance payments of up to $250, which can go up to $300 for children under 6. If any credit remains, you can claim it on your tax returns for 2021.
Some families may not qualify for any of the above payments. They can, however, still receive up to $500 for dependents under 18. Children between the ages of 19 and 24 may qualify as well, provided that they were in school for five months of a year.
Additionally, 6% of dependents include older dependents. They may qualify for the $500 credit as well.
How is Child Tax Credit Different in 2021?
Certain stipulations in the American Rescue Plan Act have increased child tax credits and reduced eligibility requirements for low-income families.
In 2020, the tax credit per child was $2,000. This increased to $3,000 in 2021. In 2020, if the tax credit exceeds the tax owed, the family can get a refund of up to $1,400. In 2021, it is fully refundable.
In 2020, the joint return threshold was $400,000, and in other cases, it is $200,000. In 2021, the threshold for joint return is $150,000, the threshold for the head of the household is $112,500, and for all others, it is $75,000.
In 2021, the child tax credit also includes the advance payments feature. In 2020, there were no special rules because of coronavirus. In 2020, families making less than $2,500 did not qualify for the tax credit, whereas this is not the case in 2021.
How do Monthly Advance Payments Work?
The first option you have is to claim all of your child tax credit while doing your 2021 taxes. The other is to receive monthly advance payments for the second half of the year.
Under monthly advance payments, you get a monthly payment of $250 or $300 on the 15th of every month. This excludes holidays. So you receive a monthly advance payment every month from July 15th or December 15th.
The process includes dividing your payments according to your child tax credit. For example, if your credit is $3,000, this amount will be divided equally into six months. You get paid through bank transfer, debit card, or check.
Before sending advance payments, the IRS will check if you qualify for the child tax credit, review how old your children are, and decide on a monthly payment for you. If you do not file a tax return, you can still use this non-filer’s tool to get monthly payments.
If you received a child tax credit in 2019 and 2020, you will automatically start receiving advance payments. If you did not qualify for the tax credit in 2020 but think that you will in 2021, you should update your information on the Child Tax Credit Portal.
If fearing that they will phase out, families want to opt-out of advance payments, they should wait for the option to come up on the portal and then update their information.
Sometimes, you may receive credit prepayment despite being ineligible for it. In that case, you should send the money back to the IRS. You can use the EFTPS portal to make estimated tax payments whenever you want.
What Impact Does Child Tax Credit Have on Poverty?
In 2018, the child tax credit helped take 4.3 million people out of poverty. It reduced the poverty of 12 million people. This number increased when combined with Earned Income Tax Credit (EITC). In 2021, projections indicate that poverty will fall by 45%, which may go up to 50%. Those families who did not qualify for other tax benefits such as the Child and Dependent Care Tax Credit found the child tax credit very beneficial.
The American Rescue Plan Act also changed many aspects of child tax credit to address problems during the COVID-19 pandemic and to recognize better how costly it is to raise children. This Act encouraged the Government to better aid low-income families with children.
Despite the improvements, this expanded credit will end in 2021. In 2022, the policies and limits will go back to the way they were in 2020. This could be problematic.
After the enactment of the child credit, there were many changes. The tax credit amount was reduced, the requirements made more stringent, and the refunds too less. Though this helped identify fraudulent claims and aided high-income phase-out, they did not benefit families with very low incomes.
When the tax credit rules go back to the way they were post-pandemic, the political and economic implications will need a thorough review and some changes.
Apart from reducing poverty, the child tax credit has other advantages. When families receive a tax credit and see a rise in their income, they can provide their children with better opportunities.
Students perform better in school, the health of children improves, and in adulthood, they end up earning more.
Child Tax Credit Calculator
You can always hire an accountant or a bookkeeper to calculate your child tax credit. However, if you want to do it yourself, you can use a child tax credit calculator.
You need to add all of these details accurately to avoid accounting errors:
- Year of tax return
- Total number of dependents included on your tax return
- Number of 6-year-old children on December 31st, 2021
- Number of children between 6 and 17
- Modified Adjusted Gross Income
- Filing Status
Once you click “submit,” you will receive the maximum child tax credit and the tax credit for any other dependent. You will also receive a child tax credit breakdown.
Tests for Child Tax Credit
Some requirements for the child tax credit include:
- Dependent test
- Support test
- Relationship test
- Age test
- Residence test
- Family income test
- Citizenship test
These tests establish crucial information such as the age of the child, whether the child is dependent, and whether you provide support to the child.
They also determine whether the child is a U.S citizen or a legal resident, how much income the family makes, and the relationship of the taxpayer to the child.
As a Final Observation
The child tax credit is a form of relief given to low-income families. It involves a reduction in tax liability through a refundable tax credit. Families with children of or under 17 qualify for a tax credit of $3,000.
Those with children under 6 qualify for a credit of up to $3,600. Some dependents ages between 19 and 24 may also qualify provided that they have been in school for five months a year.
The American Rescue Plan Act 2021 has introduced a higher amount of tax credit and reduced eligibility requirements. This has reduced poverty by 45% and provided low-income families with relief during the COVID-19 pandemic.
Final Thoughts from the Hall Accounting Team
If you have an effective tax plan, you offset your tax burden and boost your tax efficiency. Other benefits include reducing healthcare expenses or offering your retirement with contributions.
However, you can only develop a strong tax planning strategy when you start early, not when the year ends. Keep in mind creating a tax plan early will help you save more on your annual income tax.
Monthly tax planning services are a fantastic tool to do this. At Hall Accounting, we have had tremendous success with our monthly clients. Schedule a call today to learn more about this service, and see if it is a good fit for you and your business.
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