What is the Child Tax Credit?
The Child Tax Credit is a tax benefit offered by the government to eligible families. It provides a certain amount of tax relief per qualified child. The credit is intended to ease the financial burden associated with child-rearing expenses and help families meet their financial obligations.
Understanding the Changes in the Child Tax Credit
It’s crucial to stay informed about any changes or updates to the Child Tax Credit. In recent years, there have been significant modifications to the credit, including increased amounts and expanded eligibility. Familiarize yourself with the latest changes to maximize your benefits.
In 2021, Congress agreed to expand the Child Tax Credit (CTC) through the American Rescue Plan Act. For this year only (so far), the Child Tax Credit will be significantly larger than it has been in years past for people who make below a certain income level. Even more beneficial, there will be advance payments made to families who qualify for the credit starting July 15.
This guide answers all your questions about the Advance Child Tax Credit based on the latest information from the IRS. We talked to Clare Herceg, founder of Let’s Get Set—a fintech company dedicated to helping families ensure they get the most out of available tax credits each year when they file taxes. It’s a service that’s more crucial than ever now for changes like this to the Child Tax Credit.
Here’s how Clare summarizes the changes to the child tax credit:
“In a nutshell, the credit was expanded in size from $2,000 to $3,000-$3,600, and half of the credit can be accessed in 2021 via monthly payments. Notably, unlike the old credit, this one is fully refundable which means parents can access it even if they don’t have any income or don’t owe taxes.”
Clare Herceg, Let’s Get Set
Click on the questions below for details on Child Tax Credit and what it will mean for you in your specific financial situation.
Benefits of the Child Tax Credit
The Child Tax Credit offers several benefits to eligible families. These benefits include:
- Direct reduction in your tax liability
- Potential refundable portion of the credit
- Help in covering child-related expenses
- Increased financial stability for families
By taking advantage of the Child Tax Credit, you can experience improved financial well-being and better support for your children’s needs.
The Child Tax Credit can have a positive impact on family finances. By reducing your tax burden, the credit frees up resources that can be allocated to other important areas of your budget. This additional financial flexibility can contribute to better overall financial health and increased financial security for your family.
Eligibility Criteria
To qualify for the Child Tax Credit, you must meet specific eligibility criteria. These include:
- Having a dependent child who meets the age requirements
- Meeting the income threshold specified by the government
- Maintaining a valid Social Security number for each child claimed
- Filing a tax return, even if you’re not required to do so
Meeting these criteria is essential to determine whether you can benefit from the Child Tax Credit.
Check your eligibility now to avoid advance child tax credit delays!
Advance payments for the Child Tax Credit begin this week on Wednesday, July 15. If your direct deposit information is set up correctly, you can begin receiving these payments within the week. That makes it crucial to use the tools that the IRS has provided to ensure you can receive your payments promptly.
- Use the IRS Child Tax Credit Eligibility Assistant to confirm you are eligible to receive these advances.
- You will need your 2020 or 2019 tax returns or income and expense information to complete the steps for this assistant.
- It is available in English and Spanish.
- If you do not traditionally file taxes, then you should use the IRS Non-Filers Tool to submit your information so your payments can be processed.
- You will need to provide full names for you and your dependent(s) with valid Social Security numbers or other taxpayer ID information.
- You will also want your bank account information to set up direct deposit
- Then all parents should use the Child Tax Credit Update Portal to:
- Confirm you are enrolled to receive payments
- Opt-out of receiving payments
- Provide bank account information for direct deposit or update your existing information if it’s changed
Don’t wait to take these steps so you can ensure you being receiving your advances as soon as possible.
How to Apply for the Child Tax Credit
When filing your tax return, it’s crucial to understand how to properly claim the Child Tax Credit. Consult with a tax professional or refer to the official IRS guidelines to ensure accurate reporting and maximize your tax benefits. Claiming the credit correctly can make a significant difference in your tax liability and potential refund.
Applying for the Child Tax Credit is a relatively straightforward process. When filing your annual tax return, you’ll need to provide the necessary information about your eligible children. Make sure you accurately report their Social Security numbers and other required details to ensure your eligibility for the credit.
Frequently Asked Questions (FAQs)
Yes, the Child Tax Credit allows you to claim the credit for each qualified child.
Yes, a portion of the Child Tax Credit is refundable, which means you may receive a refund even if your tax liability is lower than the credit amount.
Yes, there are income limits. Higher-income families may experience a reduced credit amount or may not be eligible for the credit.
The maximum amount of the Child Tax Credit varies each year. It is essential to stay updated with the current IRS guidelines.
The Child Tax Credit is available annually, allowing you to claim it on your tax return each year.
In 2021, the size of the Child Tax Credit (CTC) will increase significantly for millions of parents. The amount you can receive depends on the age of the child dependent you claim:
Families will receive $3,000 for each dependent age 6 to 17
The credit is $3,600 for each dependent under age 6
The standard Child Tax Credit is $2,000 for any dependent under age 17.
So, this increases the credit by at least $1,000 or more, depending on the age of the child. It also allows for families to receive advance payments for six months starting in July
Qualifying for the Child Tax Credit depends on two things:
Your modified adjusted gross income (the income you claim on your taxes)
Whether you have a qualifying child dependent
For the basic CTC, your adjusted gross income must be below $400,000 if you are married filing jointly or below $200,000 for all other filing statuses. However, to receive the expanded CTC and get advance payments this year, the income limits are lower.
“Parents at the lowest income thresholds receive the full value of the credit,” Herceg explains.
The expanded CTC will be phased out if your income is above these limits:
Filing status
Income limit
Married filing jointly
$150,000
Head of household
$112,500
All other filing statues
$75,000
Thus, if you are married filing jointly and make $175,000 annually, you can claim the standard child tax credit ($2,000) next year when you file your taxes. However, you will not get the expanded payment and you will not receive advance payments this year.
In early July, the IRS launched a tool called the Advance Child Tax Credit Eligibility Assistant. This automated tool walks you through qualifying so you can confirm if you are eligible. You will need your 2020 or 2019 tax returns or your W-2s or 1099s and a list of expenses to complete the steps needed to see if you qualify. The assistant is available in English and Spanish.
The advance child tax credit provides advance payments on this year’s expanded Child Tax Credit. From July to December, eligible taxpayers will receive monthly advances of up to half of their CTC for the year. The payments are set to begin on July 15, 2021.
So, for instance, let’s say you are a single parent who makes $75,000 per year and has two children, age 5 and 15. Your total child tax credit for 2021 would be $6,600—that’s $3,000 for the older child and $3,600 for the younger one.
Since the IRS allows you to advance up to 50% of your CTC for the year, you would be able to advance $3,300. Spread out over the six months of payments, you would receive $550 per month.
As with the third round of stimulus payments, the IRS will be using people’s 2020 income tax returns to determine how much families are eligible to receive. For families that have not filed their 2020 tax returns, their 2019 tax returns will be used.
“If parents filed a 2020 tax return, then the payments should be automatic,” Herceg says. “Filing a 2020 tax return is the best way to make sure the IRS has the most up-to-date information and to get set up to receive those credits.”
“We strongly encourage families to file their 2020 taxes using free tax prep because many families don’t realize that they actually are eligible for credits or may be eligible to get back money they’ve prepaid in taxes. We estimate that parents leave $12B in unclaimed credits on the table each year by not filing or filing to claim credits like the Earned Income Tax Credit.”
As the IRS states on their website, “The IRS urges people with children to file their 2020 tax returns as soon as possible to make sure they’re eligible for the appropriate amount of the CTC as well as any other tax credits they’re eligible for, including the Earned Income Tax Credit (EITC). Filing electronically with direct deposit also can speed refunds and future advance CTC payments.”
You can use your 2020 or 2019 tax returns to confirm you are eligible to receive payments through the IRS Eligibility Assistant; it’s available in English and Spanish.
If you do not file normally file taxes because you receive federal benefits, such as SSI or SSDI, or because you do not make enough money, the IRS has launched a non-filers tool that you can use to verify you are eligible to receive the advances.
As with stimulus payments, the advance CTC payments will arrive the same way you receive your tax refund each year. Thus, if you received your refund and stimulus payments via direct deposit, your advance CTC payments will arrive the same way.
Direct deposit is the fastest method that you can receive these types of payments, which is why the IRS is encouraging people to file their taxes electronically and set up direct deposit. You may receive your payment on the same day they begin to disburse them.
If you do not set up direct deposit, then you would receive your advance payments by mail. The most likely way would be that the IRS will issue you a debit card with the payment. This is how most mailed stimulus payments were handled. Recipients received an EIP card (economic impact payment card) that had their stimulus funds loaded on the card.
You can use the Child Tax Credit Update Portal to add or change your bank account information so you can receive direct deposit. If you have changed banks since you filed your taxes last, you should use this tool to make sure your information is current.
If you have already filed your 2020 tax returns, you’re in a good position. The IRS says that you won’t need to do anything extra to receive your payments.
If you filed your 2020 return electronically and used direct deposit for your refund, then your payments should arrive on or just after July 15, 2021. You can use the IRS Child Tax Credit Portal to confirm you are enrolled and scheduled to receive advance payments.
If you have not filed your 2020 tax returns, then this the step that the IRS is encouraging you to take. Even if you don’t traditionally file taxes, you may want to file this year to ensure you receive your advance payments. Otherwise, you can use the IRS Non-filer’s Tool to confirm you are eligible to receive these payments.
Yes. The IRS has established the Child Tax Credit Portal to allow parents to make changes to their advance payment information. If you do not wish to receive these advances, use the portal to opt-out.
The IRS has a Child Tax Credit Portal set up where parents can confirm they are enrolled to receive the CTC advances and manage their payments. You can change your bank account information through this portal. If you receive tax refunds by mail but prefer to get these advances through direct deposit, you can update your information here as well.
The IRS will send the advance CTC payments to the parent that claimed each child as a dependent on their 2020 annual income taxes. If you have not filed your 2020 tax returns, then the dependent information from your 2019 tax returns would be used.
If you are co-parenting, only the parent that claims the child as a dependent would receive any advance payment.
Yes. For any Child Tax Credit calculations, an adopted child is treated as your own child. As long as they meet the criteria of a qualifying child (see below) then you would receive the additional CTC and advance payments.
There are eight conditions required for a child to count as a qualifying child for the basic child tax credit:
The child must be your son, daughter, stepchild, foster child, grandchild, niece, or nephew.
They must be age 17 or younger in 2021; for the $3,600 CTC, the child must be under age 6 in 2021.
The child did not provide more than half his or her own support in 2021.
They lived with you for more than half of 2021.
You will claim them as a dependent on your 2021 tax returns.
The child doesn’t file a joint tax return.
They are a U.S. citizen, national or resident alien.
The child has a valid Social Security number.
This depends on what type of garnishment you’re facing. The advance payments for the Child Tax Credit will be subject to the same garnishment rules as the third stimulus payment.
The payments will not be garnished for back child support, back taxes, or other Federal or state debts.
They can be garnished by private debt collectors, so if you have a garnishment order in place, you may see your payments garnished.
Yes. The IRS clearly states on their information page, “The credit for qualifying children is fully refundable, which means that taxpayers can benefit from the credit even if they don’t have earned income or don’t owe any income taxes.”
So, even if you didn’t make any income in 2020, you could still file your 2020 tax returns to receive this credit and the advances.
Summary
The Child Tax Credit is a valuable financial resource for families, helping to alleviate some of the costs associated with raising children. By understanding the eligibility criteria, staying informed about any changes, and properly claiming the credit, you can make the most of this tax benefit. Take advantage of the Child Tax Credit to provide a more secure financial future for your family.
