What is the Child Tax Credit?
The Child Tax Credit uses a parent’s modified adjusted gross income to provide a fully refundable tax credit for the 2021 tax year. A fully refundable credit is one that you receive even if you report no income. This means that if a parent qualifies for the credit and files taxes, they may claim the credit.
Can all parents claim the Child Tax Credit?
No. Parents must file taxes and qualify under residency requirements and income limits in order to claim the Child Tax Credit.
Parents who have their main home in the U.S. for more than half of the year and have children who are 17 or younger on the last day of the year will meet the residency requirement. U.S. military personnel and federal employees assigned outside of the U.S. also qualify.
There are income limits that apply to the Child Tax Credit. For 2021, qualifying parents must have the following modified adjusted gross income (MAGI):
- $75,000 or less for those who file single or married filing separately.
- $112,000 or less for those who file head of household.
- $150,000 or less for those who file married filing jointly.
When taxpayers exceed those income limits, the credit is reduced:
- For every $1,000 in additional MAGI, the credit is reduced by $50 for any child, with a floor of the original $2,000 credit.
- If the taxpayer's MAGI is more than $200,000 ($400,000 for married filing jointly), the credit continues the $50 reduction per $1,000 in additional MAGI with no floor.
How much is the Child Tax Credit and what changed in 2021?
Congress passed the American Rescue Plan Act (ARPA) in 2021 in response to the COVID-19 pandemic. Temporary changes were made to the Child Tax Credit for 2021 as a result of the new law. Some of those temporary modifications include:
- An increased credit amount.
- Children who turn 17 in 2021 now qualify.
- As much as 50% of the credit may be available in advance.
Before 2021, the Child Tax Credit was $2,000 per qualifying child, with $1,400 per child being the maximum allowable refund for individuals with no income. ARPA increases the credit to $3,000 for each child aged 6-17 at the end of 2021. For taxpayers with children under the age of 6 at the end of 2021, the credit increases to $3,600.
For parents with little or no income from a job, self-employment, or other sources, the $1,400 refundable limit no longer applies provided their main home is within the U.S.
Are cash payments available for the Child Tax Credit?
Yes. Ordinarily, taxpayers receive the Child Tax Credit when they file their annual income tax return. As of July 2021, the IRS will pay one-half of the credit in advance. To be eligible, the taxpayer must have resided in the U.S. for more than half the year. The IRS also considers U.S. military personnel and federal employees with overseas assignments as eligible.
The IRS bases the amount on the income reported on your 2020 tax return. If you did not file a 2020 tax return, the IRS bases the payment on your 2019 return.
Do parents automatically get the Child Tax Credit?
To automatically receive the Child Tax Credit, the taxpayer must file a tax return in 2022 for 2021. The IRS also allows parents to verify eligibility for monthly advanced payments by using the Child Tax Credit Update Portal. To receive advance payments for the Child Tax Credit, a parent must have filed a 2020 (or 2019) tax return. This portal also allows parents to update or add a bank account to receive direct deposits. Parents may opt out of the advance payments in order to receive a single lump sum.
Do co-parents that share custody and support 50/50 both get the Child Tax Credit?
No. If parents file taxes separately, the parent that claims the child as a dependent on their tax return receives the credit. If parents file separately and both try to claim the child as a dependent, the IRS will only recognize one parent’s claim. In these situations, the parent with whom the child primarily lives will typically be who the IRS allows to claim the child as a dependent. In short, there is one credit for each child.
Often, joint child custody agreements with income tax provisions will control who receives the credit. These agreements can, however, provide for alternating years or other creative solutions to ensure both parents share the tax benefits.
Will the Child Tax Credit affect public benefits?
The Child Tax Credit has no impact on any public benefits. Even more, the Child Tax Credit is not subject to offset for overdue taxes or other federal or state debts that taxpayers or their spouses owe. However, child support arrearages may continue to offset these credits.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.