If you have children or young dependents, you may be eligible to claim the child tax credit for 2021 and reduce your tax bill or increase your refund.
New legislation has raised the child tax credit for 2021
Be aware of the child tax credit income phaseout limits and qualification guidelines
Understand the difference between refundable and nonrefundable credits
If you’re a parent, you may have gotten a letter in the mail telling you about a new child tax credit for 2021 and the monthly advance payments the IRS is sending to more than 36 million American families under the American Rescue Plan Act (a law targeted at helping to relieve some of the financial burdens facing families due to the COVID-19 pandemic). Like many parents, you probably have questions. What is the child tax credit? How much will you get? Who’s eligible? And how will the monthly child tax credit payments impact your taxes?
That’s a lot of questions. But each one has an answer. Here’s what you need to know about the 2021 child tax credit and what the changes mean for you and your family.
First, you should understand there’s a difference between a tax credit and a tax deduction. With deductions, you subtract an amount from your income before you figure out how much, if any, you owe. Credits, on the other hand, mean you figure out the amount of tax you owe, if any, and then subtract the amount of the credit. Refundable credits can reduce your tax liability below zero; nonrefundable credits don’t.
For the 2021 tax year, there are significant changes to the child tax credit you should know about. For starters, children up to 17 years old qualify for the credit. This year, the child tax credit increases to $3,000 per qualifying child or dependent ages 6 to 17; $3,600 per child under age 6. Pre-2021, the child tax credit was capped at $2,000 per qualifying dependent child 16 or younger.
Also, you have a choice: You can either claim 100% of your child tax credit when you file your 2021 taxes (the tax return due in April 2022) or you can opt to get 50% now and claim the other 50% on your 2021 tax return.
If you choose the latter, the IRS will use your most recent tax return to determine whether you qualify for the child tax credit and your kids’ ages so it knows how much to send each month. If your family is eligible, you’ll receive monthly child tax credit payments from July through December 2021.
You’ll be paid by check, debit card, or direct deposit to your bank account. Your monthly child tax credit payments may be up to $250 per child ages 6 to 17 and up to $300 per child under 6. The remainder will be paid in a lump sum when you file your 2021 tax return. Keep in mind, these child tax credit enhancements don’t guarantee you’ll automatically receive that amount for each child. To qualify for the credit, your family must meet certain income requirements (more on this below). That said, you can still claim an additional $500 nonrefundable credit for other qualifying dependents.
Biological children, of course, but also step or foster children, their siblings or step-siblings, half-siblings, or a descendant of any of them such as your grandchild, niece, or nephew, according to the IRS.
Qualifying children must be age 17 or younger at the end of the year, and you must claim them as dependents. They won’t qualify if they provided more than half of their own support during the year, and in general, they need to have lived with you for more than half the year. Additionally, they must be U.S. citizens, U.S. nationals, or U.S. residents.
You can claim the child tax credit on form 1040 or 1040-NR. So, how much is the child tax credit? To figure it out, use the child tax credit worksheet provided by the IRS and include Schedule 8812 when filing your 2021 tax return.
Not all families with children will qualify for the higher child tax credit of $3,000 or $3,600, although most will. In short: It’s an earnings consideration. The child tax credit phases out the more you earn.
For married couples filing a joint return for the 2021 tax year, the child tax credit phaseout begins at $150,000 of modified adjusted gross income. For single filers, the phaseout begins at $75,000.
For each $1,000 above these thresholds, the amount of the child tax credit is reduced by 5%, or $50. This phaseout applies only to the $1,000 or $1,600 temporary increased child tax credit for 2021, not the normal $2,000 credit for other tax years.
The 2021 expanded child tax credit is fully refundable. Even if your total tax liability is zero for the 2021 tax year, you could potentially receive a full refund from Uncle Sam for each qualifying dependent. Previously, the child tax credit was only refundable up to $1,400 for certain families if their child credit exceeded their tax liability. Under the new child tax credit rules for 2021, you don’t need to be employed or have other earnings to claim the credit. Before the change, families had to have at least $2,500 in earnings to qualify for the child tax credit. There was also a cap on the refundable portion—15% of earned income that exceeds $2,500.
You may also be eligible for another child tax break—the child and dependent care tax credit. This credit may qualify you for up to 50% of $8,000 in childcare and similar expenses for a child under 13, a spouse or parent who’s unable to care for themselves, or another dependent, so you can work. This credit goes up to $16,000 for two or more dependents. With offices reopening and many parents returning to work full time, it may be worth seeing if you qualify.
Note that the amount of allowable expenses decreases for higher-income earners, and so does the credit. In addition, the child and dependent care credit was nonrefundable in the past; it is fully refundable for the 2021 tax year.
Remember, the child tax credit is in addition to the credits you get for child and dependent care expenses.
And one more thing to keep in mind: The 2021 child tax credit applies only for this tax year. If the rules aren’t extended by additional legislation, then the child tax credit may revert back to what it was in 2020, with some adjustments for inflation.
If you do end up with a refund, you could consider saving it for future college expenses. TD Ameritrade can help guide you through investment choices to develop the most appropriate investing strategy for higher education.
The key to filing taxes is being prepared. TD Ameritrade provides information and resources to help you navigate tax season.
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