If you have children or other dependents under the age of 17, you likely qualify for the Child Tax Credit. It’s been increased as part of the American Rescue Plan, which was signed by President Biden in March 2021 as part of a U.S. government effort to help families deal with the financial hardships stemming from the COVID-19 pandemic. Direct cash payments began on July 15. There are also a number of income limits you should know about when planning how much you’ll receive. Since planning your family’s finances goes beyond just taxes, consider working with a local financial advisor to optimize your plans.
What Is the Child Tax Credit?
The Child Tax Credit (CTC) is designed to give an income boost to the parents or guardians of children and other dependents. The American Rescue Plan increased the CTC – for 2021 only – to help filers cope with the effect of the pandemic. It applies to dependents who are 17 or younger as of the last day of the tax year. The credit is worth up to $3,600 per dependent, but your income level determines exactly how much you can get. In past years, the credit was $2,000 per dependent.
You should note that President Joe Biden’s Build Back Better Act proposes to extend the the American Rescue Plan’s expanded CTC for one additional year. However, negotiations in the Democratic party have stalled. And as of January 2022, the expansion of the credit has expired.
Should the Build Back Better Act not pass, qualifying families who already got the maximum advance of $1,800 for the expanded credit will get the other half refunded when they file their 2021 tax year returns in early 2022. For qualifying taxpayers who have opted out of getting advanced payments, they will be refunded the full expanded credit upon filing their taxes.
How Did the Expanded Child Care Work?
The expanded CTC phases out for wealthier families. The expanded tax credit offered for pandemic relief begins to phase out at $75,000 (modified adjusted gross income) for single filers or those who are married filing separately, $112,500 for head of household filers and $150,000 for joint filers or those filing as qualifying widows or widowers. Ordinarily, the CTC phases out at $200,000 or $400,000 depending on filing status.
The CTC won’t begin to be reduced below $2,000 per child until your modified AGI in 2021 exceeds 400,000 if married and filing a joint return or $200,000 for all other filing statuses. The second phaseout reduces the CTC by $50 for each $1,000 (or fraction thereof) by which your modified AGI exceeds the relevant income threshold.
The CTC is fully refundable. This is different from past years when it was only refundable up to $1,400. So for your 2021 taxes, that means if you qualify for the CTC and it brings your tax liability below zero, the IRS would send you the remaining amount.
The Internal Revenue Service (IRS) will begin the monthly payments on the 15th of every month beginning in July and continuing through December. Half of the credit amount will be paid in advance in installments, and the other half will be claimed by families on their tax returns in 2022.
As a reminder, tax credits directly reduce the amount you owe the IRS. So, if your tax bill is $3,000 but you’re eligible for $1,000 in tax credits, your bill is now $2,000. This differs from a tax deduction, which reduces how much of your income is subject to income tax.
Which Dependents Are Eligible for the Child Tax Credit?
Eligibility for the CTC hinges on a few factors. The child you claim as your dependent has to meet seven pieces of criteria from the IRS:
- Age Test: The child was under age 18 at the end of the tax year. The CTC is increased for children under age 6.
- Relationship Test: The child is your daughter, son, stepchild, foster child, adopted child, brother, sister, stepbrother, stepsister, half-sister or half-brother. The child can also be the direct descendant of any of those just mentioned (your grandchild, niece or nephew).
- Support Test: The child did not provide more than half of their own support for the tax year. The child also cannot file a joint return that year.
- Dependent Test: The child must be claimed as your dependent on your federal tax return.
- Citizen and Resident Test: The child has to be a U.S. citizen, a U.S. national or a U.S. resident alien. The child must also have a Social Security number.
- Residency Test: The child must have lived with you for more than half of the tax year.
- Income Test: This is the same requirements as the ones listed earlier. In short, the CTC begins phasing out for families with income above $75,000 (single filers), $112,500 (heads of household) or $150,000 (joint filers).
How to Claim and Track Your Child Tax Credit
Here’s what you need to know about claiming your credit. Eligible filers can claim the CTC on Form 1040, line 12a, or on Form 1040NR, line 49. To help you determine exactly how much of the credit you qualify for, you can use the Child Tax Credit and Credit for Other Dependents Worksheet provided by the Internal Revenue Service. If you need to file a return for a year before 2018, you can only claim the credit on Forms 1040, 1040A or 1040NR.
Eligible recipients who did not receive the right amount or nothing at all should verify their information on the IRS Child Tax Credit Update Portal. For cases where the portal shows that payment has already been disbursed but not received, a trace or inquiry to locate funds can be filed by mailing or faxing Form 3911 to the agency.
There could be a payment delay depending on the disbursement method. The IRS says that it can trace payments:
- 5 days after the deposit date and the bank says it hasn’t received the payment
- 4 weeks after the payment is in the mail by check to a standard address
- 6 weeks after the payment is in the mail, and you have a forwarding address on file with the local post office
- 9 weeks after the payment is in the mail, and you have a foreign address
The agency updates its frequently asked questions page with information about Child Tax Credit payments and posts notifications about delays.
Other Credits for Children and Dependents
There are several other federal and some state provisions that help families caring for children and other dependents.
Additional Child Tax Credit (ACTC)
This credit effectively gave you a refund if the CTC reduced your tax bill to less than zero. (Remember that the CTC was previously not refundable.) The ACTC is largely phased out, but if you need to file a return for a tax year previous to 2018, you can find information for the ACTC on the Form 1040.
Starting with the 2018 tax year, there is an additional $500 Credit for Other Dependents (ODC). This allows you to claim non-child dependents, such as a parent, and dependents who are college students (under age 24). The eligibility requirements are very similar but you cannot claim the ODC for a dependent who qualifies for the CTC.
Child and Dependent Care Tax Credit (CDCTC)
You can claim this credit if you have earned income and if you’re paying someone else to care for a dependent. Unlike the CTC, which you can only claim if you’re the parent or guardian of minor children, you can claim the CDCTC for aging parents and other disabled relatives. Qualifying dependents for the CDCTC include the following:
- Children who are 12 or younger at the end of the tax year
- Dependent adult family members or spouses who are not able to care for themselves due to mental or physical impairments, unless they had gross income of $4,150 or
With the CDCTC, you can claim a credit for up to 35% of qualified care expenses. The exact percentage that you are eligible to deduct depends on your income level. The maximum amount of care expenses to which you can apply the credit is $3,000 if you have one dependent and $6,000 if you have more than one dependent. That means the largest possible credit is $1,050 with one dependent and $2,100 with multiple. The CDCTC is non-refundable. According to the IRS, expenses that qualify for the CDCTC include money that you paid “for household services and care of the qualifying person while you worked or looked for work.” Child support payments do not qualify. To claim the CDCTC, you need to fill out Form 2441.
Some states offer a complementary state-level CTC and/or CDCTC that matches part or all of the federal credit. In some states, the credits are refundable and in other states they are not. This state-by-state guide breaks down which states offer their own Earned Income Tax Credit, CTC or CDCTC.
The IRS offers child tax credits to help parents and guardians offset some of the costs of raising a family. If you have a dependent who isn’t your direct child, you may also be eligible to claim a credit. And because some child tax credits are refundable, you might even make some money in the end.
Remember that the information surrounding child tax credits can change each year. In turn, it’s important to keep up on the current laws each tax year so you know what to expect.
Tips for Saving on Your Taxes
- A financial advisor can help you optimize your tax strategy for your family’s needs. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- To make sure you don’t miss a credit or deduction that you qualify for, use a good tax software. SmartAsset evaluated common tax filing services to find the best online tax software for your specific situation.
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