Your Guide to the Child Tax Credit

In 1997, the federal government created the Child Tax Credit (CTC) aimed at helping families with dependent children, and in early March 2021, this tax credit was expanded, to provide families much-needed funds during difficult times.

But, parents aren’t the only ones that stand to gain from these tax credit expansions—small businesses and their owners can benefit from them, too. Keep reading to find out how.

 

What’s a tax credit?

This is simple. Tax credits reduce the amount of taxes you owe; you simply subtract the tax credit amount from your tax liability. When a tax credit is refundable that means that if the credit amount exceeds the amount of taxes you owe, you will get a check for the difference. The Child Tax Credit is partially refundable for tax year 2020 and fully refundable for tax year 2021. 

During the COVID-19 pandemic, the federal government expanded, extended, and even created new tax credits to help provide financial relief during this trying time. You can learn about COVID-19 tax credits here. 

What is the Child Tax Credit?

Since the late ’90s, the Child Tax Credit has helped millions of American parents raise their families. As a tax credit, it decreases a taxpayer’s tax liability on a dollar-for-dollar basis for every qualifying dependent child.

In addition to the CTC, the federal government also offers another tax credit (which we’ll cover in a bit) to help parents offset the cost of care for children and other dependents while they’re at work.

The requirements and financial assistance offered by both credits differ for the 2020 and 2021 tax years. But if no new laws are enacted to keep these expansions, these credits will revert back to their 2020 requirements with adjustments for inflation.

Advance payments for the 2021 tax year start July 15, 2021.

How does the Child Tax Credit work for the 2021 tax year?

The CTC for 2021 to $3,000 annually ($250 monthly) for children ages 6–17 and $3,600 ($300 monthly) for children age 5 and below. 

Advance payments on the CTC for the 2021 tax year stat on July 15, 2021.

The credit (which was partially refundable for the 2020 tax year) is fully refundable for 2021 if you have lived in the U.S. for more than half the year. This means that if the credit reduces your tax bill to zero and you still have credit left over, you may get a refund check for the remaining amount. Additionally, even if you have no tax liability, you may still receive a refund provided you meet all of the other qualifications. 

In some cases (covered below), you may qualify for the Additional Child Tax Credit, allowing you to claim part or all of the remaining balance.  

Who qualifies for the CTC in 2021?

Every qualifying child must:

• Be related to you
• Be a US citizen, national, or resident alien
• Be under the age of 17 by the end of the 2021 tax year
• Have a Social Security Number
• Live with you for six months or more during the year
• Not have provided over half of their financial support during the year
• Be claimed as a dependent on your tax return

To receive the credit, the IRS requires that you include the name, date of birth, and Social Security Number of every child on your tax return. 

To qualify for the $3,000 tax credit, children must be between six and 17 years of age on December 31, 2021. For the $3,600 tax credit, children must be five years old or younger on that date.

The tax credit now phases out for:

• Single filers with an AGI over $75,000
• Head of household filers with an AGI over $112,500
• Married couples filing jointly with an AGI over $400,000

How you will receive the CTC payments

The American Rescue Plan directed the IRS to send six periodic payments between July and December 2021 to qualifying families that have opted in to receive the CTC advance payments. To determine family eligibility and the age of the children, the IRS will use the tax returns filed for 2020, or the ones for 2019 if those have not been filed yet. 

What is the Additional Child Tax Credit and how can I claim it?

The Additional Child Tax Credit (ACTC) was created to assist families that have tax liabilities too low to take full advantage of the Child Tax Credit. As a result, the ACTC offers a refund of up to $1,400 on the CTC for parents that meet additional qualifications. 

In addition to the CTC’s requirements, taxpayers must either:

• Have earned income of $2,500 or more for the tax year
• Have three or more qualifying children 

If you’re unsure about your eligibility, you can fill out the Child Tax Credit worksheet found in the instructions for Form 1040. 

Those who qualify must complete Schedule 8812 and file it with their federal income tax return to receive the credit. Fortunately, the form is only one page long and is less complicated than other tax forms. 

What changes have been made to the Child Care Tax Credit for 2021?

The Child Care Tax Credit was designed to help parents pay for the cost of care for young children or other dependents (such as an incapacitated spouse or parent) in their household so they can work or look for work.

For the 2020 tax year, this credit offered a maximum of $1,050 for families with one qualifying dependent and $2,100 for those with two or more. The American Rescue Plan increases the credit this year to a maximum of $4,000 for one child and $8,000 for families with more than one. 

This tax credit is nonrefundable for 2020 and fully refundable for 2021. 

Requirements for the new Child Care Tax Credit

The full credit is available to families making up to $125,000 and it fully phases out for those with an AGI of over $400,000.

To qualify for the tax credit, dependents must:

• Be a child 12 years old or younger at the time that they receive childcare, or a spouse, parent, or other dependent that is physically or mentally incapable of caring for themselves
• Have lived with you for at least six months out of the year

Additionally, taxpayers cannot claim the credit for payments made to care providers that are your spouse, a parent of the dependent child, a dependent listed on their tax return, or their child who is 18 years or older. 

To verify that this isn’t the case, tax filers must provide the name, address and Taxpayer Identification Number (TIN) of their care provider. 

How did the Child Tax Credit work for the 2020 tax year?

For tax year 2020, the CTC was worth $2,000 for every qualifying child listed on your 2020 tax returns. It was also nonrefundable for 2020, which means that if your tax credit was greater than the amount you owed in taxes, you didn’t have to pay anything—but you didn’t get the unused credit either. 

Why are these changes important for employers?

Because the Child Tax Credit guarantees a monthly income for parents, the ARPA reduces some of the financial pressure and mental stress placed on working parents so they can focus on their responsibilities while on the job.

The Child Care Tax Credit also ensures that parents can go to work and keep their jobs—saving employers the time, money, and effort needed to fire, hire, and train their replacements. 

Commonly asked questions about the Child Tax Credit

Accessing and understanding the tax credit can be confusing, so here are a few frequently asked questions and CTC.

Do you need to take action to access the CTC payments?

No. If you filed taxes, the IRS will use this information to make the payments. 80 percent of recipients will see the tax credit payment deposited directly within their bank accounts, while others may receive a check or debit card in the mail.

Can you update your direct deposit information with the IRS?

This one is complicated. For now, the IRS is using the information from your last tax return and they haven’t yet set up a system to allow people to update that information. This may change in the future.

Can you update your family information with the IRS?

This is the same answer as above. Right now, the IRS uses your tax returns to determine the number of children you have. If something changes that the IRS should know about there is no way to update on the fly. But, remember, payments being made now are based on your situation from the 2020 tax year.

How are non-filers (those who don’t file taxes) supposed to access the tax credit payments?

Similar to the way that the IRS created a system online to allow non-filers to receive stimulus payments, they will establish a similar system for these payments.

Will the 2021 rates for the CTC be extended?

We don’t know yet, but certain members of Congress, along with President Biden, are calling on an extension of the current tax credit rates to continue until 2026.