The child tax credit is a federal benefit that puts money back in the pockets of qualifying families. Money Girl covers what the credit is, who qualifies for it, and how to receive it as advance monthly payments in 2021.
You've probably been hearing a lot about the child tax credit payments that the IRS is sending many American families. You may have already seen the money show up in your bank account.
This episode will review what the child tax credit is and who qualifies for it. You'll find out how much you could receive and if it could affect your future tax refund.
What Is the Child Tax Credit?
The child tax credit isn't a new benefit for Americans - it's been around since 1997. However, due to COVID relief, known as the American Rescue Plan of 2021, the credit has changed significantly for a limited period.
If you have kids, you're probably familiar with the child tax credit. But if you don't, the credit may be news to you. So, here's a primer.
The child tax credit is a federal benefit for qualifying taxpayers with one or more qualifying dependent children. It puts more money back in the pockets of families by reducing the amount of tax they owe or increasing their tax refunds.
Unlike a tax deduction, a tax credit cuts your tax bill on a dollar-for-dollar basis, making it more valuable. For instance, if you owe $1,000 in taxes and qualify for a $250 tax credit, your tax liability gets cut to $750.
Let's compare that scenario to getting a $1,000 tax deduction. A deduction doesn't reduce the actual amount of tax owed but instead reduces your taxable income. Let's say you qualify for a $1,000 tax deduction. Depending on your average tax rate, it may end up saving you about $200 in taxes, which is much less than for a $1,000 tax credit.
How Much is the Child Tax Credit?
How much money you could save by claiming the child tax credit depends on your income and family size. Before the pandemic, it paid qualified taxpayers $2,000 per child under age 17.
Legislation boosted the credit to $3,000 per child under age 18, starting in 2020. Additionally, if you have a child under age six, you qualify for a $3,600 credit.
Another change for 2021 is that the child tax credit is fully refundable. That means you receive it even if the amount exceeds what you owe in taxes.
If you're single with MAGI above $240,000, or a joint filer earning more than $440,000, you become ineligible for the credit.
For example, if you owe $1,000 in taxes and qualify for a $3,000 credit, the IRS pays you the difference, or $2,000. That's different from a non-refundable credit, which only allows you to receive a maximum amount that reduces your tax liability to $0. In other words, a non-refundable credit never puts money back in your pocket - it only offsets what you owe the government.
As I mentioned, the child tax credit is now fully refundable, allowing families to take advantage of every penny of the benefit. Additionally, starting July 2021, up to 50% of your credit can be paid in advance as monthly payments through the end of the year.
Advance payments can be up to $300 per month per child under age six, and up to $250 for each child age six through 17, by December 31, 2021. You can also claim a one-time credit of $500 for dependent children over age 18, including full-time college students up to age 24.
When Do You Receive Advance Child Tax Credit Payments?
The first of six advance credit payments went out on July 15, 2021. They'll continue getting paid on August 13, September 15, October 15, November 15, and December 15. The payments don't get considered taxable income because they're a tax benefit that you receive early.
Note that if no additional legislation gets passed, starting in 2022, the child tax credit will revert to pre-pandemic rules, reducing the credit amount to $2,000 per child and eliminating monthly advance payments. However, the American Families Plan is a proposal that would extend the child tax credit through 2025 and maintain its fully refundable status if Congress enacts it.
Who Qualifies for the Child Tax Credit?
Knowing if you qualify for the child tax credit is clear-cut for some families but confusing for others. You must have a primary home in the U.S. for more than half the years or file a joint tax return with a spouse who does.
Only one taxpayer can claim the child tax credit per child, even if they live in more than one household during the year.
Only one taxpayer can claim the child tax credit per child, even if they live in more than one household during the year. If one parent has primary custody, that parent typically receives the credit.
However, for joint custody arrangements, parents must agree on who will claim the credit. One option may be for a different parent to claim it in alternating years. However, since 2021 pays a higher-than-normal benefit, it may be wise for parents to agree to split the funds between themselves in some fair proportion.
Additionally, families may have other caretakers besides parents, such as siblings, grandparents, aunts, or uncles, who may be entitled to the child tax credit based on their level of financial support for a dependent child.
To be eligible for the credit, both the taxpayer and qualifying dependent child must be U.S. citizens, U.S. nationals, or U.S. resident aliens with Social Security numbers. The dependent must have lived with the person claiming the credit for more than half of the year and be claimed as a dependent on their tax return.
Also, the child must not have provided more than half of their own financial support during the year. If you're not sure if a dependent qualifies you to claim the child tax credit, there's a handy tool at IRS.gov to check out for guidance. If you're still unsure, consider speaking with a qualified tax accountant for advice.
What Are the Child Tax Credit Income Limits?
Be aware that not every family qualifies to claim the child tax credit. It was created to give financial help to qualifying low- and middle-income taxpayers. Therefore, if you earn over an annual threshold, your benefit may be reduced or eliminated.
Here are the limits for modified adjusted gross income (MAGI) by tax filing status you must meet to claim the full child tax credit for 2021:
- Singles must earn $75,000 or less
- Heads of household must earn $112,500 or less
- Married couples filing taxes jointly must earn $150,000 or less
For example, a family with annual MAGI of $150,000 and three children ages 2, 5, and 10 would receive total credits of $10,200 for 2021. That breaks down to $3,600 plus $3,600 for the two youngest children and another $3,000 for the oldest child.
That family would receive half of the credit in advance by receiving payments of $850 per month. Over six months, the advance would total $5,100, and the remaining $5,100 balance would be paid as a tax refund by mid-April in 2022.
Another example is a single parent with MAGI of $60,000 and an 8-year-old. They would qualify for an advance payment of $250 per month starting in July 2021.
For those earning more than the thresholds I just reviewed, you either qualify for no tax credit or a reduced amount, based on your income and tax filing status. Since you're single with MAGI of $240,000, or a joint filer with $440,000, you become ineligible for the credit.
How Do You Get the Child Tax Credit?
If you qualify for the child tax credit, it's essential to make sure the IRS knows how to pay you. That's especially important if you're someone who doesn't typically file a tax return because you have a low income. Remember that you can still get advance credit payments even if you have no income if you're eligible.
The fastest way to receive advance payments is by direct deposit, using a bank account, prepaid debit card, or mobile app. If you received stimulus payments in 2020 and haven't moved or changed your bank account, you should automatically receive the advance credit payments if you're eligible.
However, if you didn't receive a stimulus payment or you weren't required to file taxes for 2020, be sure to use the IRS signup tool to inform the government that you're qualified for payments and where to send them.
Can You Opt Out of the Child Tax Credit?
You also have the option to opt-out of the monthly advance payments if you prefer to take the full credit on your 2021 tax return instead. Underpayments or overpayments of the child tax credit get reconciled when you file taxes next year, so unenrolling could prevent having an unexpected tax liability.
Underpayments or overpayments of the child tax credit get reconciled when you file taxes next year, so unenrolling could prevent having an unexpected tax liability.
However, if you have income below $40,000 as a single taxpayer or $60,000 as a married couple filing taxes jointly, there's a cap on how much of the credit you could have to repay. So, for most people, getting the advance payments is a wise financial move.
While the advance payments reduce your tax refund for the year, they may still be higher than your typical refund due to the higher tax credit amount for 2021. But if you choose to opt-out of advance payments, visit the IRS Child Tax Credit Update Portal.
For more information about eligibility for the child tax credit, check out the following resources at IRS.gov:
- Eligibility for Advance Child Tax Credit Payments and the 2021 Child Tax Credit
- Calculation of Advance Child Tax Credit Payments
- Updating Your Child Tax Credit Information During 2021
- Child Tax Credit Non-Filer Sign-up Tool
- Advance Payments of the Child Tax Credit: Which Online Tool Should I Use
What questions do you have about taxes for your personal or business finances? Leave Laura a voicemail question, comment, or idea for a future topic by calling 302-364-0308. Be sure to follow Laura on Instagram and learn more about her books, online courses, and free newsletter at LauraDAdams.com.