How does the child tax credit affect taxes?

It’s now tax season, and you may have started thinking about how you are going to save money on taxes. There are countless factors to consider when doing your taxes this year. A major one is how COVID affected you and your family.

This year’s tax law changes also focus on children, and one way to save money on taxes this year is through a new application of the child tax credit. 

Please note that MoneyLion does not provide tax advice. Please consult a tax and/or legal advisor for guidance regarding your individual situation. 

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What is the child tax credit?

The child tax credit (CTC) is a fundamental tax credit that is available to eligible taxpayers each and every year. It is fully refundable, meaning that even if you do not have to pay federal taxes, you’re still eligible to receive the tax credit. But the amount that is available to be claimed, as well as the rules for who is eligible, may vary from year to year.

This year, the pandemic changed many things, and one of those is the CTC. If you remember the American Rescue Plan, it was developed and put into motion in response to the COVID-19 pandemic. As a result, the largest child tax credit in American history was implemented, as announced on the White House’s website.

Also, for the first time ever, eligible families that filed taxes in 2019 or 2020, or signed up for the stimulus packages through the IRS, started receiving the CTC in the form of $300 payments per month for every child under 6 years old and $250 payments per month for every child under 17 years old. These payments started in July of 2021.

Who qualifies for the child tax credit?

The new rules bring several changes regarding who is eligible to receive the CTC. These changes include income levels, age groups for children, and several other factors. 

In order to qualify, one of the following must be true:

• You must have filed a 2019 or 2020 tax return and claimed the CTC on the return or
• You must have signed up to receive the 2020 stimulus or
• You must have given the IRS your information in 2021 with the Non-Filer Submit Your Information tool

And you must also meet all of the following:

• You or your spouse, if filing jointly, must have had a main house or lived in the US for at least half of the year. 
• You must have paid at least 50% of child support for the year and the child must have also lived with you for at least half of the year. 
• The child must be under the age of 18 and have a valid Social Security number. 

Income Levels

In order to qualify for the full amount, your income would need to earn below $150,000 as a household, or $112,500 as the head of the household, or $75,000 if you are a single filer or married while filing a separate return. You can still receive the CTC if you earn higher than these amounts, but a phaseout begins once you break the threshold.

Other eligibility requirements

There are a few other requirements to take note of. One is that your child cannot file a joint tax return, or make more than half of their own income for the given tax year. You can read all about the qualifications directly on the IRS’s website.

Amount per child 

For the first time, children aged 17 will be included in the CTC. The increase from $2,000 to $3,600 is also the largest increase in history. Here is the breakdown for different age groups:

• $3,600 for each child under the age of 6 
• $3,000 for each child age 6 through 17

How the child tax credit impacts your taxes

The amount of advance payments you received throughout the year will affect how much you will receive in your tax refund. The IRS should have sent you a 6419 letter detailing all of the relevant information.

Use this letter to understand important information about how the CTC works as well as an accounting of the amount of money you have already received. It will tell you what you need to do when you file your 2021 tax returns. You can also visit the CTC tax portal for a suite of tools.

If you opted out of advance payments

If you chose to opt out of the child tax credit, and if you’re eligible, then all you need to do is confirm your eligibility and claim your dependents on your 2021 tax returns. 

If you don’t normally file taxes

Some families or individuals who do not meet the income requirements to file tax returns may have not filed in the previous years, but have claimed the advance payments using the Non-Filers Sign Up tool. In that case, it is essential that you file a tax return for 2021 in order to receive the rest of your CTC.

Are advanced child tax credit payments taxable?

The child tax credit payments are not considered income, so that means they are not taxable. However, the government used your 2020 income to calculate the amount of payments that you received, and there is an important detail to consider.

If you received advance payments and did anything that changes your eligible status in 2021, like get a much higher paying job or you moved out of the US for more than half the year, then it is possible that the government would consider the advance CTC to be an overpayment. In these scenarios, the CTC would be considered regular income, and therefore taxable.

Do I have to pay back the child tax credit?

If you were overpaid, it’s possible that your tax bill will increase. However, the IRS does offer repayment protection for qualifying families and individuals. If you make more than $80,000 to $120,000 depending on how you are filing, then you won’t qualify for the CTC and it’s likely you will need to repay.

Due diligence pays off

Staying on top of the requirements can literally pay, and if you are eligible, you definitely don’t want to miss out on the money that is owed to you. Doing your due diligence and preparing for tax season can also ensure you won’t miss out on any advance payments you may be eligible for.

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