Content of the material
- What Is the Child Tax Credit?
- The Regular Child Tax Credit Rules
- Special Child Tax Credit Rules for 2021
- Can I claim my child for the child tax credit?
- Interest Rates
- 4. Education Tax Credit
- 2. Child Tax Credit (CTC)
- What is the maximum amount of Additional Child Tax Credit?
- Is the Tax Credit for 2021 the Same as the 2020 Credit?
- Treasury Payments
- How the Child Tax Credit Works
- IRS Letter 6419
- In 2020
- For 2021
- After 2021
- Additional Resources
What Is the Child Tax Credit?
The child tax credit is only available if you have what the IRS calls a “qualifying child.” A qualifying child is a child who qualifies as a dependent for tax purposes. A qualifying child can be your son, daughter, stepchild, adopted child, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them—for example, your grandchild, niece, or nephew. A qualifying child must:
- live with you for over half the year
- provide less than half of their own support
- be a U.S. citizen, resident, or national, and
- have a Social Security number which you must provide on your tax return.
Normally, the child tax credit may be claimed only if you have a qualifying child under age 17 at the end of the year. You get no credit if a child turned 17 during the year. However, for 2021 only, the age of a qualifying child is increased to children under age 18 at the end of the year.
The IRS has an online questionnaire you can complete to determine if you have a qualifying child. Visit the page at the IRS website.
Before you get too excited about how much money Junior is going to save you on your taxes, read on. The child tax credit is subject to an income threshold and the amount of credit you can take each year goes down as your income approaches that threshold amount.
The Regular Child Tax Credit Rules
Under the regular child tax credit rules in effect during 2018 through 2025 (but not for 2021), everyone with a qualifying child starts out the tax year entitled to a $2,000 credit per child for the tax year. This credit is gradually phased out for taxpayers whose incomes rise up to and above the annual threshold amount specified for the year. Specifically, for each $1,000 that your modified adjusted gross income exceeds the income threshold level, the total child tax credit for a family (not the amount per child) is reduced by $50. If you make too much money, you won’t get any credit at all. However, the Tax Cuts and Jobs Act greatly increased the amount you can earn and still receive the credit. Indeed, only a small fraction of all taxpayers are unable to obtain the credit.
The child tax credit starts to be reduced only when your adjusted gross income reaches the following levels:
- $400,000 for married couples filing separately, and
- $200,000 for all other taxpayers.
For example, a married couple filing jointly with one qualifying child gets no child tax credit if their adjusted gross income exceeds $440,000. The $2,000 credit they started the tax year with would be whittled down to zero by 40 $50 reductions.
The child tax credit is partly refundable—that is, you may collect it even if you owe no taxes for the year. The maximum refundable amount is $1,400 per child. But the actual refundable amount you can collect if you owe no tax for the year depends on your earned income (generally, wages, salary, tips, or net earnings from self-employment). The refundable amount is equal to 15% of your earned income over $2,500, up to the maximum $1,400 credit. For example, if your earned income is $10,000, your refundable credit would be 15% x ($10,000 – $2,500) = $1,125.
If you have three or more qualifying children and receive the earned income credit, you can use a different formula to figure your refundable credit. With this formula, your refundable credit is equal to the amount your Social Security taxes exceed your earned income credit. You should use this formula if it will result in a larger credit.
The Tax Cuts and Jobs Act also established a new $500 nonrefundable child care credit for dependents who are not qualifying children (also called the “family care credit”). For example, you may claim this credit for parents or grandparents if they are your dependents for tax purposes. Because this credit is nonrefundable, you may benefit from it only if you owe income taxes for the year.
Special Child Tax Credit Rules for 2021
To help families struggling in the wake of the COVD-19 pandemic, the child tax credit was expanded for 2021. For 2021 only, the child tax credit is increased to:
- $3,600 for every child under age 6, and
- $3,000 for children between the ages of 6 and 17 (one year older than the regular credit rules).
For example, a family with two children under age 6 will receive a $7,200 tax credit for 2021.
The increased credit amount is phased out for married couples with incomes over $150,000 and single parents who earn over $112,500. The credit is reduced $50 for each $1,000 your adjusted gross income exceeds these levels. For example, if you have one child over age 5, you’re entitled to a $1,000 increased credit for 2021. This amount gets reduced to 0 if you have 20 $50 reductions.
Once the increased amount is phased out, the amount of the credit remains $2,000 until the $400,000/$200,000 phaseout limits under the regular rules apply.
The entire credit is refundable—you get the full amount even if you owe no taxes.
In addition, starting July 15, 2021, the IRS began paying 50% of the credit each month to eligible families by direct deposit. This will result in 50% of the credit being paid by the end of 2021. For example, if you’re entitled to a $6,000 credit, you’ll be paid $500 each month from July through December 2021. The IRS payments are based on the most recently filed return and should be sent to you by the IRS automatically. For more information or to update your banking information with the IRS, visit the IRS Child Tax Credit Update Portal.
Can I claim my child for the child tax credit?
To be eligible, the child must be your qualifying child dependent for federal tax purposes. A child must:
- Be your biological child, stepchild, adopted child, foster child, sibling, or descendent such as a grandchild, niece, or nephew.
- Not have provided more than half of their own financial support during the tax year.
- Be a US citizen or a US national or resident alien.
- Have lived with you for more than half of the year.
- Be your dependent for federal tax purposes.
For purposes of the credit, the child must be under 17 as of December 31 of the tax year.
4. Education Tax Credit
The American Opportunity Tax Credit (AOTC) is a tax credit available to parents who paid qualified education expenses for their kid’s first four years of college. You can claim expenses paid for tuition, fees and course materials.
You can claim up to $2,500 per child. That works out to be 100% of the first $2,000 you paid and 25% of the next $2,000. The AOTC is partially refundable of up to $1,000, which means if you do not owe taxes, qualifying taxpayers can receive a refund of up to this amount.
You must receive a Form 1098-T (Tuition Statement) from an eligible educational institution, like a college, university or trade school, to claim the credit. In addition, your modified gross income (MAGI) must be $80,000 or less ($160,000 if married). If you earn more than this amount, you may receive a reduced credit or no credit at all.
2. Child Tax Credit (CTC)
The CTC is a tax credit that provides a significant financial benefit to Americans with children. For 2020, the IRS allowed you to claim up to $2,000 per child under the age of 17. The credit lowered the amount you owed in taxes and you could be refunded up to $1,400.
For 2021, the CTC amount has increased up to $3,600 for children under 6 and up to $3,000 for children ages 6 to 17. Also, the credit is now fully refundable.
You will qualify for the maximum CTC amount if your modified adjusted gross income (MAGI) is up to $75,000 for single filers or up to $150,000 for married couples. If you earn more than these amounts, you will see a reduced credit, or you won’t qualify for any amount.
Your child must also meet a few qualifications to claim the CTC; they must have a valid Social Security number, have lived with you at least half the year and be related to you. Also, you must provide more than half of your child’s financial support. This can include lodging, food, utilities, repairs, clothing and education.
The American Rescue Plan Act signed into law by President Joseph Biden in March will allow families for the first time in history to receive the child tax credit in monthly payments of up to $300 per child under the age of 6 and up to $250 for children ages 6 to 17. Families will need to opt in for monthly payments using an online IRS portal starting in July.
What is the maximum amount of Additional Child Tax Credit?
The maximum Additional Child Tax Credit is $1,400 per child. If you don’t need any of your Child Tax Credit, the $600 between the $2,000 Child Tax Credit, and the $1,400 Additional Child Tax Credit per child is lost.
Is the Tax Credit for 2021 the Same as the 2020 Credit?
No. Although there are some similarities, the 2021 child tax credit differs significantly from the 2020 allowance. First, the credit increases from $2,000 for children under age 17 in 2020 to $3,600 for each child under 6 years and $3,000 for each child age 6 up to age 17 for 2021. Also, beginning in July 2021, the credit was distributed in monthly advance cash payments. The 2020 credit was only partially refundable, the 2021 credit is fully refundable. The 2021 credit targets more to benefit low- and middle-income taxpayers.
How the Child Tax Credit Works
As noted above, the Child Tax Credit for the 2021 tax year differs from the credit allowed in 2020. The 2021 changes, mandated by the American Rescue Plan, are just for 2021. For 2022, the credit will revert to the rules in effect for 2020, with some inflation adjustments. Here’s how the differences play out.
Because of the possible rules reversion, we’ll start by reviewing how the Child Tax Credit worked in 2020. Then we’ll look at 2021 tax laws (taxpayers file for 2021 in April 2022) and ahead to 2022 taxes.
IRS Letter 6419 In Jan. 2022, the IRS will send Letter 6419 to inform taxpayers of the total amount of advance payments of Child Tax Credits distributed to them in 2021—information that they will need for their 2021 tax returns.
For 2020, eligible taxpayers could claim a tax credit of $2,000 per qualifying dependent child under age 17. If the amount of the credit exceeded the tax owed, then the taxpayer generally was entitled to a refund of the excess credit amount up to $1,400 per qualifying child. The refundable portion of the credit—i.e., the additional Child Tax Credit—was designed to help taxpayers whose tax liabilities were too low to benefit from part or all of the credit.
For 2020, a special “look-back” rule allowed taxpayers to determine the amount of their credits on the basis of their 2019 income. This special provision was particularly important for taxpayers whose difference in earnings from 2019 to 2020 affected their eligibility for 2020 credit.
The 2020 credit was subject to a phaseout at the rate of $50 for each additional $1,000 (or fraction thereof) above a high-income threshold of modified adjusted gross income (MAGI). MAGI is defined as adjusted gross income (AGI) increased by the amount of certain income exclusions, deductions, and credits.
The threshold level was set at $400,000 for a joint return and $200,000 in other cases. Taxpayers entitled to claim the Child Tax Credit were permitted to adjust their income tax withholding and/or calculate their installment tax payments to reflect their allowed credit amounts.
For 2021, the credit increased and the age for a qualifying child extended to those under 18. The credit amount rose to $3,000 (children under age 18) or $3,600 (children younger than 6) and became fully refundable to the extent that it exceeded the taxes owed.
The credit phaseout generally remained $50 for each $1,000 (or fraction thereof) of modified adjusted gross income above a MAGI threshold. However, the MAGI threshold amounts for the credit phaseout were substantially reduced for 2021.
For a joint return or surviving spouse, the threshold was $150,000; for heads of households, $112,500; and for all others, $75,000. Thus, in 2021, a family with annual MAGI of $150,000 and three children, ages 2, 5, and 11, is entitled to total Child Tax Credits of $10,200, payable in advance payments of $850 per month.
Advance payments: The Child Tax Credit for 2021 introduced a new feature: advance payments. Taxpayers could receive direct advance payments of their Child Tax Credits, in amounts of $250 or $300 per qualifying child depending on age. The U.S. Treasury distributed payments on a monthly basis beginning in July 2021. The advance payment program enabled taxpayers to use their benefits during the year.
Taxpayers who were entitled to the credit for 2021 and wanted to receive advance payments as early as possible could confirm the direct deposit information for their bank through an online portal. For taxpayers who filed 2020 tax returns, the 2021 direct deposit payments were based on their 2020 income and information about dependent children. Non-filers for 2020 could receive the advance payments by registering in 2021 on an online IRS portal.
Eligible taxpayers who received advance payments for the last six months of 2021 are entitled to claim the balance of their annual credits on their 2021 tax returns. Because the advance payments represent early receipt of the tax benefits from the credits, the advance payments are not taxable income.
Underpayments or overpayments: If taxpayers received too little or too much in advance payments, then these will be reconciled, with the credit amount and refund—if any—claimed on tax returns for the 2021 year. Any shortfall in advance payments would add to the credit allowed on taxpayers’ 2021 tax returns.
Taxpayers whose advance payments exceed the allowable credit generally must pay back the excess with their tax returns. However, for lower-income taxpayers, a “safe harbor amount” of their repayment will be waived or reduced. Taxpayers who were U.S. residents for more than half of 2021 and whose MAGI for 2021 fell below specified MAGI ceilings can qualify for “repayment protection” and will not be required to repay any excess.
The full repayment protection applies for taxpayers whose MAGI is not more than the following: $60,000 for joint returns and qualifying widows and widowers, $50,000 for heads of households, and $40,000 for single filers or married individuals filing separate returns. No repayment protection is available for taxpayers with MAGI of $120,000 for joint returns and qualifying widows or widowers, $100,000 for heads of households, and $80,000 for single filers and married people filing separate returns.
In Jan. 2022, the IRS will send taxpayers a Letter 6419 reporting the full amount of advance payments received by them in 2021. Taxpayers should refer to this letter when preparing their tax returns for 2021 and retain it in their tax records.
Online help: During 2021, taxpayers who received advance payments that are excessive or too low were able to have their payments adjusted by providing corrected and updated information—e.g., change in marital status or number of qualified children—through an online information portal. Taxpayers who weren’t required to file a tax return in 2021 and had a main home in the United States for more than half of 2021 could use the IRS Non-filer Sign-up Tool to be sure that the IRS had their information for sending the advance credit payments. Wage withholding could be adjusted to reflect Child Tax Credits and advance payments. Also, taxpayers could elect not to receive advance payments and wait until filing their tax returns to claim their credit amount.
The IRS website provides extensive information about the 2021 rules for qualifying for the Child Tax Credit, calculating its amount, and dealing with advance credit payment issues.
The rules in effect for 2020 will again become effective, with some inflation adjustments, for 2022 through 2025.
- Child Tax Credits Enactments Page, NCSL
- ARPA State Fiscal Recovery Fund Allocations, NCSL
- 2021 Child Tax Credit Resources and Guidance, IRS
- Where Are Families Most at Risk of Missing Out on the Expanded Child Tax Credit?, Tax Policy Center