Your Free Guide to the Child Tax Credit

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Your Free Guide to the Child Tax Credit

You will learn about:
  • Which requirements you need to meet to qualify for Child Tax Credit payments
  • How much money you can receive
  • What these payments mean for your 2021 tax returns

14 min – Estimated reading time

Your Free Guide to the Child Tax Credit

Your Free Guide to the Child Tax Credit

child-tax-cover-2

Understanding the Child Tax Credit

The Child Tax Credit is a tax deduction that taxpayers can use to reduce the income tax that they pay each year. The way it worked in the past is that parents of children from birth to age 16 were able to deduct $2,000 per qualifying child from the amount that they owe on their income taxes when they file. 

In order to qualify, the children had to be dependents listed on the tax return, related to the taxpayer, living with the filing taxpayer for at least six months a year and be US citizens. If the parents did not owe taxes, a portion of the Child Tax Credit (up to $1,400) was refundable as long as there was at least $2,500 in income and the taxpayers earned less than $400,000 if filing jointly or $200,000 if filing singly. 

However, as part of the COVID relief provisions in the American Rescue Plan passed by Congress in March 2021, the government has changed several important things about the Child Tax Credit to get money to American families including the amount, the timing and the amount that is refundable. 

You can obtain additional information directly from the IRS at: IRS.gov/credits-deductions/2021-child-tax-credit-and-advance-child-tax-credit-payments-topic-a-general-information.

What Agency Is in Charge of the Child Tax Credit?

Since the Child Tax Credit is a deduction on your federal income taxes, everything relating to the Child Tax Credit is administered by the Internal Revenue Service (IRS), the taxing agency of the federal government. 

The IRS determines your eligibility and the amount you will be getting. They use the data they have on taxpayers from their previous years’ tax returns to make an initial determination of eligibility for the Child Tax Credit. 

However, if your family or income circumstances have substantially changed, you do have the opportunity to inform the IRS so that they can make the appropriate changes. In addition to deciding who is eligible to receive the Child Tax Credit payments, the IRS is also responsible for distributing the money directly to American taxpayers. 

The Changes for 2021

The Child Tax Credit for 2021 is different from previous years in a number of ways. Because these changes are intended to alleviate financial hardship as a result of the COVID-19 pandemic, they will only be in place for 2021, after which the Child Tax Credit will go back to the way it was before the American Rescue Plan. Here is how this year’s Child Tax Credit is different:

Amount

The highest maximum amount is now $3,600 instead of $2,000 per qualifying child. The extra money can help parents pay bills and replace some of the income they may have lost during job layoffs and closures during the pandemic.

Different Amounts Based on Age

In previous years, the amount of the Child Tax Credit was the same regardless of the age of the child, as long as they qualified (birth to age 16). In 2021, young children, from birth to age 6, qualify for more money than older children.

The maximum amount of the Child Tax Credit (which is on a sliding scale based on income, see section “How Much Money Do You Qualify to Receive?” of this guide) for children from birth to age 6 is $3,600 and the maximum amount for children aged 6-17 is $3,000.

Expanded Age Range

The credit is now available for 17 year-olds, where it was previously only available for children up to age 16. If your child is otherwise eligible and turns 17 in 2021, you should be able to claim the Child Tax Credit for him or her. However, if you have a 17-year-old who turns 18 in 2021, you cannot claim the Child Tax Credit for that child.

Refundable Amount

For 2021, the entire amount of the Child Tax Credit is now refundable, rather than only a portion, as in the past. The regular rules specified that certain low-income people whose tax liability was less than the total Child Tax Credit of $2,000 per qualifying child could only get a refund of $1,400 per child. 

The new rule for 2021 means that people who have overpaid their taxes through payroll deductions or do not earn enough to need to pay taxes in the first place can still receive the entire benefit of the Child Tax Credit by getting it via a tax refund from the IRS. 

Removal of Minimum Income Requirement

The new provision in the American Rescue Plan removes the income floor, so now no minimum income is required to claim the Child Tax Credit. Before, taxpayers were required to earn at least $2,500. However, for 2021, Americans who have earned no or very little money can still get the Child Tax Credit. 

Prepayment

Half of the Child Tax Credit amount will be prepaid in monthly payments before taxes are filed instead of needing to wait until after tax filing and processing by the IRS. For example, a family with one 4-year-old child is eligible to receive $3,600. Of this, half which amounts to $1,800, will be paid out by the government in six monthly installments of $300 each beginning in July 2021 and going through December 2021. The remainder will either offset taxes owed or will be included in the taxpayer’s tax refund when the tax return is filed and processed by the IRS after April 15, 2022.

Determining Your Eligibility

To be eligible, you must have one or more dependent children who: 

  • Are under age 18 for the entirety of 2021
  • Have a valid Social Security number 
  • Live with you at least six months a year
  • Are US citizens
  • And you must have earned less than certain income limits (see the section “How Much Money Do You Qualify to Receive?” below)

Most of the people who will be receiving the Child Tax Credit in 2021 are taxpayers who have previously claimed the Child Tax Credit on their returns. Since when you claim a child as a dependent on your tax return, you input the child’s birth date, the IRS knows the age of your children and will know if they meet the age requirements.

The IRS looks first at your tax return for 2020. If you did not file in 2020 or you did file but the IRS has not yet processed your return, they will look at your 2019 tax return to see if you claimed any dependent children who might still be 17 or younger in 2021.

If you have previously claimed the Child Tax Credit on recent tax returns or are otherwise considered to be eligible by the IRS, you will be receiving several letters from the IRS in the mail. If you do not receive these letters, it may indicate that the IRS does not consider you eligible to receive the Child Tax Credit, even if you do qualify. 

For example, if you have not filed a tax return for 2020 or 2019, the IRS will not have records on you that it can refer to. Likewise, if you have had a new baby or adopted a child since you filed your last tax return, the IRS has no way to know this. If this is the case, you can register yourself with the IRS’ Child Tax Credit Non-filer Sign-up Tool at https://www.irs.gov/credits-deductions/child-tax-credit-non-filer-sign-up-tool

How Much Money Do You Qualify to Receive?

To know what to expect, you can calculate the amount you will receive based on your children’s ages and your income.  To be clear, the income that the IRS is using to calculate the amount of your tax credit is your modified adjusted gross income.

The modified adjusted gross income (MAGI) is your adjusted gross income or AGI (this can be found on your previous year’s tax return, form 1040, line 7) plus the amounts of any of the following that apply to you: 

  • Deductions you took for IRA contributions and taxable Social Security payments
  • Foreign income you had excluded to get your AGI
  • Interest from any EE savings bonds you used to pay college tuition
  • Losses from a partnership
  • Passive income or loss
  • Rental losses
  • Adoption expenses

For most people, their modified adjusted gross income is the same as their adjusted gross income since the add-backs do not apply to them.

Generally speaking, you will receive up to $3,600 per child under the age of 6 and $3,000 per child for children ages 6-17. However, these amounts can be reduced based on your income. The more you earn, the lower the amount of the Child Tax Credit. 

There are two income benchmarks at which the Child Tax Credit is reduced. For every $1,000 you earn over the two-income benchmarks, your Child Tax Credit is reduced by $50 per qualifying child. The first benchmark is if you earn more than:

  • $150,000 if married and filing a joint return or if filing as a qualifying widow or widower;
  • $112,500 if filing as head of household; or
  • $75,000 if you are a single filer or are married and filing a separate return

The second benchmark is if you earn more than:

  • $400,000 if married and filing a joint return or 
  • $200,000 if filing any other way

You can use this online calculator from H&R Block to calculate the amount of your Child Tax Credit: https://www.hrblock.com/child-tax-credit-calculator/

Total Amount of Child Tax Credit Based on Income

MAGI rangeAmount for each child aged 0-6Amount for each child aged 6-17
If you earn less than:$150,000 if married and filing a joint return or if filing as a qualifying widow or widower; $112,500 if filing as head of household; or $75,000 if you are a single filer or are married and filing a separate return$3,600$3,000
If you earn more than: $400,000 if married and filing a joint return or $200,000 if filing any other way$2,000 minus $50 for every $1,000 or fraction above $400,000 or $200,000, whichever applies$2,000 minus $50 for every $1,000 or fraction above $400,000 or $200,000, whichever applies

How and When You Will Receive the Money

If you qualify, you will not receive the total amount of the Child Tax Credit at one time. Half of the Child Tax Credit amount will be paid out in monthly payments and the remainder will be paid in a lump sum. The monthly payments will be paid over a period of six months, beginning in July 2021. The payments will be sent on the following dates according to the IRS:

  • July 15
  • August 13
  • September 15
  • October 15
  • November 15
  • December 15

You will receive either checks in the mail or direct deposits into your bank account, depending on what you had previously set up with the IRS. However, you are able to set up or change your direct deposit information or address that the IRS has on file for you by going on the IRS’ Child Tax Credit Update Portal at https://www.irs.gov/credits-deductions/child-tax-credit-update-portal

You can also use this portal to check to see if you are enrolled to get the advance payments and to unenroll in advance payments (see section “Will You Owe Money to the IRS Because of These Payments?” of this guide).

Will You Owe Money to the IRS Because of These Payments?

It is possible that come tax time, you will owe some of this money back to the IRS. In effect, the advance payments assume that when you file your 2021 taxes that all of the things that qualify you to receive the Child Tax Credit have remained the same from 2020. 

However, if your family circumstances or income change, you may no longer qualify. For example, you may have a child who is now older than 17, or your income for 2021 may be higher than on the previous year’s tax return.  

If you think this might be true for your family and that you will not meet the qualification requirements once it is time to file your 2021 tax return, you can unenroll from the automatic payments. If you do not unenroll, you may have to pay some of that money back when you file your taxes. 

Some people also may prefer to unenroll from the advance payments because they want to receive a bigger lump sum refund after they file their taxes. You can unenroll online at https://www.irs.gov/credits-deductions/child-tax-credit-update-portal.

How the Child Tax Credit Can Impact You

The advance payments and increased amount of the Child Tax Credit can really make a difference to American parents this year. Because of income lost during the pandemic, many families are struggling to pay overdue bills, and the money from the Child Tax Credit can help fill in some of that gap. 

Certain tax experts estimate that the advance Child Tax Credit payments (the monthly portion) along with other parts of the American Rescue Plan will reduce the number of American children living in poverty by at least half, from 13.7% to 6.5% lifting millions above the poverty line.

Although you may get these payments automatically, it is not guaranteed because it depends on whether the IRS thinks you qualify based on what it knows about you from your past tax returns. But circumstances change and they may not have complete information. For example, if you have had a child or adopted a child since you filed your 2020 taxes, you will only get the Child Tax Credit payments if you let the IRS know by registering yourself. 

You may also have had a drop in income from 2020, due to the pandemic or some other reason, so the IRS may not think you meet the income qualifications unless you tell them otherwise.

When you file your 2021 taxes, the advance payments of the Child Tax Credit will not count as income. However, if you got more than you were actually entitled to, that extra amount will be added to your taxes due.

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