What do onesies, binkies of every size and color, swaddles plastered with fluffy animals, and tax credits have in common? If you had a child in the last year, they all play a significant role in your life. As any new parent can attest, diapers and bottles aren’t cheap, particularly with inflation on the rise. Luckily, the newly enhanced Child Tax Credit can provide an influx of cash to help with the expenses of having a child. Whether you had a newborn in 2021 or are a seasoned parent looking for financial resources, you may be eligible to claim a child tax credit. Here’s what you need to know.
A financial advisor could help you create a financial plan for your family’s needs and goals.
What Is the Child Tax Credit?
The Child Tax Credit (CTC) gives financial relief to families who have children who will be younger than 18 years old by the end of the year. The CTC is part of the American Rescue Plan Act passed in March 2021.
Parents with children or other family that they claim as a dependent on their tax return should take advantage of the CTC. Even if your dependent is a stepchild, foster child, sibling, or grandchild, you are still likely eligible according to IRS guidelines.
Note that pending new legislation, the child tax credit in 2022, which you will file with your 2023 tax return, will revert back to $2,000 for each dependent age 17 and under.
Who Qualifies for the Child Tax Credit of 2021?
Your modified adjusted gross income (MAGI) from the previous tax year will determine if you can receive the child tax credit. For those filing single, your modified adjusted gross income must be less than $75,000. For heads of household, it must be under $112,500, and for married filing jointly, it must be less than $150,000.
If you’re above these income levels, you may receive a reduced amount of the CTC. If your income is less than $400,000 and you’re married filing jointly, or less than $200,000 with any other filing status, your CTC may be lowered by $50 for every $1,000 of income above the modified adjusted gross income limits mentioned earlier. The minimum you’ll receive for the CTC is $2,000 for each child.
Similarly, if you’re married filing jointly with an income above $400,000 or any other filing status with an income above $200,000, your CTC will continue to lower by $50 for every $1,000. Depending on your income level, you may receive no CTC whatsoever because of this calculation.
There are further stipulations for the CTC. For example, your child cannot financially support themselves for more than half of their living expenses for the year. Your child also is not allowed to file a joint tax return. Additionally, you (or your spouse, if you’re filing jointly) need to have lived in the U.S. for over half the year.
If you had a newborn within the last year, use the IRS’s Child Tax Credit Update Portal to opt in to advance CTC payments and ensure the number of children on file is accurate. Also, your child or dependent must have one of the following citizenship statuses: U.S. citizen, U.S. national, or U.S. resident alien.
How Much Do You Get for Each Child?
The American Rescue Plan Act increased child tax credit payments so that families will receive $3,600 per child under age six and $3,000 per child from age 6 to 17.
CTC changes also made it possible for parents to claim half their total payment in advance. Advance CTC payments come monthly, and if you receive them, the IRS will credit the other half of the CTC to you when you file your taxes.
How to Add a Newborn to the Child Tax Credit
You can add a newborn to the child tax credit on Schedule 8812, which is part of your Form 1040. You must provide proof of credit eligibly by providing additional documentation such as:
- Newborn’s birth certificate
- Proof of health insurance for newborn
- Newborn’s child care records
- Newborn’s Social Security card
On Form 14815, you can find a complete list of the child tax credit documents you can use.
If your family received advanced payments in 2021, you must file Letter 6419 as part of your return. Families who received advanced payments were sent letters at the end of 2021 and the beginning of 2022 with the total advance payment amount and number of qualifying children.
It’s important to keep in mind, as we stated earlier, that because Congress didn’t pass an extension of the enhanced benefit or an extension of monthly payments, the 2022 child tax credit is set to $2,000 for each dependent age 17 or younger.
How the Child Tax Credit Impacts Your Taxes
Whether you owe taxes or are owed a refund, the child tax credit will benefit you. The IRS will apply your CTC to the amount you owe, and any surplus will come to you as a refund. Note that if you took half the CTC in advance payments or if your tax situation changed during the year, it will affect your CTC refund when you file taxes.
- If you opted for advance payments, the IRS will send you Letter 6419 laying out how much they sent you during the year. Any change or error in the amount of dependents you have can be reconciled through this letter, and the IRS will make the according adjustments on your tax return.
- If you decided not to take payments throughout the year, the process is more streamlined. When you do your taxes, you’ll submit your number of eligible dependents, and the IRS will verify your information and send you the refund due according to your income.
- If you usually don’t file a tax return because of your income level, you’ll want to file to claim your CTC refund.
Do You Have to Pay Back the Tax Credit?
The child tax credit does not count as income that the government taxes. That said, if you received CTC payments throughout the year that don’t accurately reflect your tax-related circumstances, some of that money may be due back to the federal government.
Because the IRS determines your CTC from the previous year’s tax return, it doesn’t account for any changes in your situation in the current tax year.
For example, say one of your dependents turns eighteen during the current tax year. When you file taxes, the federal government will note that change and adjust the calculation for your CTC. Depending on your tax situation, you may owe the IRS due to the payments you received after your dependent aged out of qualifying.
If you have a newborn, you may be able to take advantage of the Child Tax Credit if your income falls within limits set by the IRS and if you live in the U.S. for more than half of the current tax year. If you choose to receive CTC payments in advance, be advised that you may owe some of that money back when you file under certain circumstances. And remember, if you don’t normally file taxes, you’ll need to file to receive the CTC tax credit, and the funds you receive will not be considered taxable income.
If you need more help navigating your financial and tax situation, it’s wise to work with a tax professional for guidance.
Tax Planning Tips
- Navigating your tax situation can be daunting. Since tax rules and guidelines change all the time, consider speaking to a financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve 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.
- If this year was financially turbulent, there might be ways to reduce your tax bill. A financial advisor can harvest those losses to help lower your income tax bill. Consider speaking to them about other deductions available to reduce your tax liability, too, like charitable contributions.
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