Our baby girl will be here mid-December, and fingers crossed, she’ll make it in time to be included as a dependent on this year’s tax return. I’d say that sort of timing puts her on Santa’s nice list!
Families with young children can take advantage of a few different tax breaks, most notably the Child Tax Credit and the Child and Dependent Care Tax Credit. This year there are a few changes to note about each.
In this blog, we’ll focus on the changes to the Child Tax Credit and next month we’ll talk about the changes to the Child and Dependent Care Credit.
Child Tax Credit for 2020
The Child Tax Credit amount for 2020 was $2,000 per qualifying child age 16 or younger at the end of the calendar year.
This amount was subject to phaseout if your modified adjusted gross income (MAGI) was over $400,000 for joint filers, and $200,000 for all other filers.
As in years prior, there were a few additional eligibility requirements that must have been met to qualify for the credit. Children were required to be U.S. citizens, nationals, or resident aliens and have a social security number. Qualifying children must have been claimed on your tax return as a dependent and have lived with the you for more than 6 months out of the year. Additionally, a qualifying child must not have provided more than half of their own support during the year.
Up to $1,400 of the credit was refundable, meaning it could reduce your tax bill to zero and if it pushed you into refund territory you could get up to $1,400 back.
Just for the 2020 tax year, there were special lookback rules due to the pandemic. You could use either your 2019 or your 2020 tax return to calculate the credit, whichever gave you the largest amount.
Expanded Child Tax Credit for 2021
Another result of the pandemic was The American Rescue Plan Act, also known as the COVID-19 Stimulus Package, which has significantly expanded the Child Tax Credit for 2021.
This year, families can receive a credit of up to $3,600 per qualifying child ages 5 and under. For children ages 6-17, families can receive a credit of up to $3,000 per child.
For both 2020 and 2021, eligible taxpayers can claim a nonrefundable tax credit of $500 for each dependent other than a qualifying child.
As in 2020, additional eligibility requirements, such as residency, must be met to claim the credit.
The 2021 credit is fully refundable and not subject to limits, as it was in 2020.
Additionally, there are two phaseouts for the credit this year. If your modified adjusted gross income (MAGI) exceeds $150,000 for joint filers, $112,500 for head of household, or $75,000 as a single filer, your credit will begin to be reduced to as low as $2,000 per child. This will decrease $50 for every $1,000 where your MAGI exceeds the threshold.
The second phaseout mimics the 2020 rules. Your credit won’t begin to be reduced below $2,000 unless your MAGI exceeds $400,000 for joint filers, and $200,000 for all other filing statuses. The reduction schedule applies here as it does with the first phaseout, a $50 reduction for every $1,000 by which your MAGI exceeds the threshold.
Starting July 15th, you may have received advanced monthly payments on this credit if you had eligible children on last year’s tax return and did not opt out of the advanced payments on the IRS’s website.
Advanced Monthly Payments
There are a couple of options when it comes to claiming your 2021 Child Tax Credit.
You can either claim 100% of the credit when you file your 2021 return (due in April 2022), or you can receive 50% of the credit now in the form of advanced monthly payments and claim the other 50% when your return is filed.
If you choose to receive 50% up front, you’ll get six monthly payments starting July 15th through the end of the year.
The IRS will use your most recent tax return to determine whether you qualify for credit and to see how old your children will be.
If you’re having, or have had, a baby in 2021 and have no other dependents as of your 2020 filing, your child would not have been reported on your 2020 tax return and therefore would not trigger the advanced payments to start. This is true, unless of course you provided the IRS with your dependent’s information in order to claim a stimulus payment.
If you’d rather settle up at tax time and claim the credit then, you’ll have to opt out via the IRS’s Child Tax Credit Update portal.
Are Monthly Payments Right for You?
Monthly checks from the government sound great but if you’re likely to owe the IRS when you go to file next year and start receiving payments now, you could be in for a surprise bill at filing time. This could be especially true for families with multiple children, who may qualify for larger payments.
If you’re unsure about where you stand with your tax withholding and anticipated tax liability for the year, you can always check the IRS Tax Withholding Estimator website, or better yet, check with your tax preparer.
2022 to 2026
Unless the Expanded Child Tax Credit is extended into next year with American Families Plan, it will likely revert to the conditions of the Tax Cuts and Jobs Act (TCJA) from 2017, which doubled the credit from $1,000 to $2,000 per child. Many of the changes from the TCJA are scheduled to sunset at the end of 2025, meaning in 2026 the credit could potentially revert to the $1,000 level.
I’m sure this isn’t the last we’ve heard about changes to the Child Tax Credit.