What do I need to know about claiming the child tax credit?
Raising a child isn’t cheap. According to a 2019 analysis by EverQuote, it costs about $2,319,162 to raise a family in the United States, including providing common family expenses like housing, food, transportation, insurance, child care, and vacations. For parents, tax season is a chance to recoup some of those costs.
There are several parental tax deductions and credits available to eligible families. Some are only available to parents who pay day care costs or higher education expenses. But the child tax credit doesn’t require parents to cover any particular costs.
Given the 2021 tax code changes, it’s time to look into how to claim this valuable federal income tax credit and how much it’s worth.
Who Can Claim the Child Tax Credit?
For the 2021 tax year, the American Rescue Plan Act temporarily increased the child tax credit (CTC), making it worth up to $3,000 per child (or $3,600 per child under age 6). That’s an increase over the previous maximum of $2,000 per child for the 2020 tax year.
To qualify, the child must meet the following requirements:
- Is a son, daughter, stepchild, adopted child, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendant of any of these — for example, your grandchild, niece, or nephew
- Is under the age of 18 at the end of the tax year
- Is a U.S. citizen with a Social Security number (SSN)
- Did not provide more than half their own support during the tax year
- Lived with you for more than half the year
- Is claimed as a dependent on your federal tax return
- Does not file a joint return with a spouse or files it only to request a refund of withheld taxes
The CTC can only be claimed once per child per year. For example, in the case of divorced parents who both qualify to claim one child as a dependent, only one can claim the child and take advantage of the CTC. If both parents try to claim the child, the IRS will apply tiebreaker rules to determine who gets to claim the dependent. The IRS explains those tiebreaker rules in detail in Publication 501.
Limitations on the Child Tax Credit
The purpose of the CTC is to help parents who need it, so the credit phases out for taxpayers with higher incomes.
If you’re a single taxpayer with an adjusted gross income (AGI) over $200,000 or a married-filing-jointly taxpayer with an AGI over $400,000, the IRS reduces your credit by 5% of your AGI. There’s no credit if your AGI is over $240,000 for single filers or $440,000 for married couples.
Refundable Portion of the Child Tax Credit
As the name suggests, the CTC is a tax credit, meaning it is a dollar-for-dollar reduction in the amount of tax you owe. If your available child tax credit exceeds your taxes owed, you can receive the remaining credit amount back as a tax refund. This refundable portion is also known as the additional child tax credit (ACTC).
In prior years, only $1,400 of the CTC was refundable.
If you believe you qualified for the CTC or the ACTC in a previous tax year and forgot to claim it, you can amend your original tax return for up to three years from the date you filed the return and get a refund of the tax you overpaid.
Advance Child Tax Credit Payments
Another change for 2021 is that the IRS will distribute half the credit in advance of the 2022 filing season, when taxpayers file their 2021 tax returns. (You can claim the other half of the credit on your 2021 income tax return.)
For children 5 and younger, eligible families can receive up to $300 monthly in advance. For children ages 6 to 17, families can receive up to $250 monthly in advance.
That amount could change based on your income. Families are eligible for the total amount if their modified AGI is under:
- $150,000 for married couples filing jointly
- $112,500 for head of household
- $75,000 for single filers and married couples who file taxes separately
If your income exceeds those limits, the IRS will reduce your advance payments by $50 for every $1,000 over the listed limits.
To qualify for the advance child tax credit payments, you (and your spouse if you file a joint tax return) must have:
- Filed a 2019 or 2020 tax return and claimed the CTC on your return, or
- Provided your information to receive economic impact payments (aka stimulus checks) using the non-filers payment info tool (which is now closed)
The IRS announced it would start issuing payments on July 15, 2021, and payments will continue monthly on the 15th of each month. The IRS will direct-deposit monthly payments into the bank account where you received your 2020 or 2019 tax refund or mail it to the address on your tax return if the IRS doesn’t have your bank account information.
You can check to see whether you’re eligible for advance payments using the IRS’s Advance Child Tax Credit Eligibility Assistant. If you believe you should receive advance payments but aren’t getting them, check your status using the IRS’s Child Tax Credit Update Portal.
If you don’t need the money this year, you also have the option of unenrolling from advance payments. Remember, advance child-tax credit payments aren’t “free money” — they’re an advance of a tax credit on your 2021 tax return. If you don’t qualify for the full credit based on your 2021 income, you may have to pay back some of those advance payments.
Some reasons you may want to opt out of the monthly payments include:
- You expect to earn more income in 2021 than you did in 2020.
- You’re no longer claiming a child as a dependent this year, which may be the case if you and the child’s other parent alternate claiming the child as a dependent each year.
- You have significant income that isn’t subject to withholding, such as capital gains or self-employment income.
To opt out, use the Child Tax Credit Update Portal at IRS.gov.
If you don’t opt out but suspect you might not qualify for the full credit on your 2021 tax return, set aside a portion of the payments to cover a potential tax bill.
Credit for Other Dependents
If you have a dependent who doesn’t meet the requirements to claim the CTC, you may still be able to claim the credit for other dependents. For instance, you can claim this credit for:
- A child who does not have an SSN but does have a Taxpayer Identification Number
- A child who is age 18 or age 19 to 24 and in school
- Other older dependents, such as an elderly parent
The maximum credit for other dependents is $500, and it has the same phase-out threshold as the CTC.
You cannot claim both the child tax credit and the credit for other dependents for the same dependent. But you can claim the child and dependent care credit in addition to the CTC or the credit for other dependents if you paid eligible day care expenses for your dependent. You can also claim the earned income tax credit (EITC) if you qualify.
Claiming the Child Tax Credit on Your Tax Return
You claim the CTC or the credit for other dependents on Line 19 of your 2021 Form 1040. You can calculate your allowable credit using the worksheet included in IRS Publication 972. If you are eligible to claim the refundable additional child tax credit, you must also complete Schedule 8812 and attach it to your Form 1040.
Some states also offer a complimentary child tax credit that can reduce your state income tax. The credit is refundable in some states and nonrefundable in others. To learn more about the available credit in your state, check out the state-by-state guide maintained by the nonprofit organization Tax Credits for Workers and Their Families.
Future of the Child Tax Credit
The American Rescue Plan Act’s changes to the CTC only apply to the 2021 tax year. Unless Congress extends these changes, the higher credit amount and advance payments will disappear after this year.
Additionally, the Tax Cuts and Jobs Act of 2017’s changes to the CTC expire after 2025 unless Congress extends them or makes them permanent. After that, the CTC reverts to its previous form:
- The credit will start to phase out once your AGI exceeds $75,000 for single filers or $110,000 for married couples
- The maximum credit will be $1,000
- The credit for other dependents will disappear
- You will need to have at least $3,000 of earned income to qualify for the credit
You can read more about the child tax credit and the credit for other dependents as well as calculate your available credit in IRS Publication 972.
Raising kids is a pricey endeavor, so pay close attention to any tax benefits that can help you offset those costs by reducing your tax liability.
The nonpartisan Tax Policy Center estimates the child tax credit delivers about $130 billion in benefits to families with children. So familiarize yourself with the rules for claiming the credit and take advantage if you’re able.
And don’t forget that if you have questions about claiming this tax credit on your tax return, you can use a tax preparation company like H&R Block. They have live CPAs available to answer your questions.