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All you need to know about the child tax credit
All you need to know about the child tax credit

The Covid19 pandemic made millions of Americans choose between parenting and paychecks. During the pandemic, many kids between the ages of 18 and under, lived below the poverty line. With the 2021 child tax credit reform, parents can now receive an enhanced credit even if they failed to pay their 2019 and 2020 taxes.

The Child Tax Credit has been expanded by the American Rescue Plan Act, as a part of the $1.9 trillion stimulus package that President Joe Biden approved during March.

These credits will greatly benefit low-income families and will reduce child poverty nearly by half, but it will also provide some extra cash to the better off American families. However, to qualify for the tax credit, there is a set income cutoff. The following individuals shall receive the full payment worth $3,600, with payments reduced by $50 for every $1,000 of income above these limits-

AGI

Status

$75,000

Single taxpayers

$112,500

Head of household

$150,000

Joint taxpayers

The payments shall phase out entirely for single taxpayers earning up to $240,000 and joint filers (married or spouse) earning $440,000.

The child tax credit was first introduced in the year 1998 where the amount was capped at $400 per year. Gradually the credit amount rose up to $3,600 in the year 2021. The age for a child to qualify is also extended to 17 years.

There are quite a few major differences between the 2020 and 2021 child tax credits namely-

Child Tax Credits 2020

Child Tax Credits 2021

  • In 2020, eligible taxpayers could claim a tax credit of $2,000 per qualifying dependent child under age 17.
  • If the amount of the credit exceeds the tax owed, the taxpayer is generally entitled to a refund of the excess credit amount up to $1,400 per qualifying child.
  • The credit is subject to a phaseout at the rate of $50 for each additional $1,000 (or fraction thereof) above a high-income threshold of MAGI.
  • For 2021, the credit increased up to $3,600, and the age for a qualifying child is extended to 17.
  • The credit amount rises to $3,000 (children under age 18) or $3,600 (children younger than 6) and becomes fully refundable to the extent it exceeds the taxes owed.
  • The 2021 credit phaseout remains at $50 for each $1,000 of a MAGI threshold. However, the threshold amounts are substantially reduced for 2021. 

To qualify for advance Child Tax Credit payments, you — and your spouse, if you filed a joint return — must have:

  • Filed a 2019 or 2020 tax return and claimed the Child Tax Credit on the return; or submitted the IRS your information in 2020 to receive the Economic Impact Payment using the Non-Filers: Enter Payment Info Here tool; and
  • A main home in the United States for more than half the year (the 50 states and the District of Columbia) or file a joint return with a spouse who has a main home in the United States for more than half the year; and
  • A qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number

These payments will be made per month from July to December-

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

The purpose of the Child Tax Credit isn’t solely focused upon easing the burden of the parents but also has economic implications. The child tax credit was initially enacted to benefit low- and moderate-income families. At higher income levels, the credit is phased out gradually.

Stay tuned to FlyFin to know more about the Child Tax Credit.

FAQs

Ques. How to receive the advanced child tax credit payments?

Ans. If the IRS possesses one’s banking information, their payments will be sent to them as a direct deposit. The IRS will use the individual’s bank account information from the following sources, in the following order:

  • Their 2020 tax return.
  • Their 2019 tax return, including information they entered into the Non-Filer tool on IRS.gov in 2020.
  • A federal agency that provides the benefits, such as Social Security Administration, Department of Veterans Affairs, or the Railroad Retirement Board.

Ques. If one is pregnant would they be eligible for the child tax credit this year?

Ans. According to the IRS- children born this year are eligible for the advance payments. Once the child receives a Social Security number, the parents may provide that information to the IRS. However, the portal feature for such updates is still under development.

If the child is deemed eligible, the IRS will recalculate the dues and spread the funds over the remaining months for the advance payments.

If for whatever reason, the payments don’t start before the end of the year, the parents will have to claim the expanded child tax credit payments when they file their 2021 return next year.

Ques. If a child turns 18 in December 2021. Will the parents receive the child credit for the months he is 17?

Ans. No. As per the rules, for the tax year 2021, a qualifying child is an individual who does not turn 18 before Jan. 1, 2022.

Ques. Are legal citizens eligible for the child tax credit?

Ans. As a legal citizen, one is eligible for the child tax credit since one typically possesses a Social Security number. Resident aliens for tax purposes are the same as citizens.

Ques. Can a grandmother supporting a grandchild claim the credit?

Ans. The grandmother is eligible to claim the credit under the head of the household category. She is entitled to the credit, as long as she manages to qualify the income threshold.