Child Tax Credit

 

The child tax credit is a credit you can qualify for if you claim a child (or children) as a dependent (or dependents) on your tax return.

Generally, you get a credit if you have any dependent children under the age of 17 (it does not include 17-year-olds) and your income is below a certain amount.

The current credit amount is $2,000 per child.

Congress made four big changes to the child tax credit for 2021 and ONLY for 2021.

First, they increased the amount of the child tax credit and have different amounts depending on the age of the child (children).

Second, if your child turned 17 during the year (2021) you can now get the full, increased credit

Third, you will get advance payments for that credit (which you can opt-out of if you wish, more information is below).

Fourth, whereas in prior years, only up to $1,400 per child was allowed as a refundable credit, for 2021 the entire amount of the credit is refundable.

Let’s look at them in order:

  1. They have increased the amount of the credit by $1,600 per child if the child is 5 years old or less in 2021. For those children, you may get a total credit of $3,600 per child.  If the child is 6 years old or older, then the increase in the child tax credit is $1,000. For the older children, you may get a credit of $3,000 each.

  2. For the children who are 6 and older, they have increased the age limit from under 17 years old to under 18 years old. So now all 17-year-old children qualify if they turn 17 during 2021.

  3. The IRS was instructed to provide an advance on the child tax credit in monthly installments which started this July. These installments will pay half of the child tax credit that people are entitled to.  The IRS will base their calculation on the last tax return that was filed and is in their records as of July 1.

  4. The credit for 2021 is fully refundable. That means that if your credit amount is more than the tax amount then you get the excess as a refund. Let’s say that the tax calculated on your income is $2,000 and the total credit is $3,000.  First, the credit reduces your tax by $2,000. Then, the extra $1,000 is issued to you as a refund.

Let’s look at an example of a married couple, the Sawyers with two children, Beth age 4, and Steven age 3.

Their total income is $120,000 a year.

The total credit they are eligible for is $7,200.

Starting in July of 2021 the IRS will send them (either by check or as a direct deposit) a monthly amount of $600 ($300 for each child). That will add up to $3,600, half of the total amount they are allowed as a credit for 2021. The other half they will get as part of their refund when they file their 2021 taxes.

One thing to keep in mind is that, that when you prepare your taxes for 2021 the actual credit will be calculated based on your 2021 income. The credit that the IRS calculates and uses for the advance was estimated by the IRS based on the income on the last tax return you filed.

What if you received an advance but it turns out you weren’t eligible for all or part of it?  In most cases, you will have to return that money.  In some cases, you can keep it. If you are receiving the advance payments, check with your tax professional if you believe you might be getting too much.

The maximum income, after which you are no longer eligible to take the credit, is $440,000 for taxpayers who are married and are filing a joint tax return, and $240,000 for everyone else.  There are, however, intermediate income phase-outs and cut-offs.

VERY IMPORTANT:  In January of 2022 you will receive a letter from the IRS informing you of the amount of Advanced Child Tax Credit they sent you in 2021. Keep that letter, it is important information used to prepare your 2021 taxes!

Here are FAQs that the IRS put together to answer some of your questions:  IRS FAQs

To opt-out of receiving the advance payments go here (you will need to set up an account on the IRS website):  Child Tax Credit Update Portal