This article has been updated for the 2021 calendar and tax years. As part of the Tax Cut & Jobs Act (tax reform) and American Rescue Plan Act of 2021, there have been notable changes to the Child Tax Credit, with a fairly significant new Child Tax Credit expansion in 2021 (see 2021 Child Tax Credit payment details here) and the opening of a new Child Tax Credit portal. Those changes impact 2021 tax year year and beyond. This article will cover all of the Child Tax Credit basics that you should know.
What is the Child Tax Credit?
The Child Tax Credit is a significant tax credit for those with qualified dependent children under age 17 (more on qualifications in a bit).
A tax credit is a subtraction from actual taxes owed, which is much more valuable than a deduction (a subtraction from your actual income). And this tax credit has the potential to be partially refundable, which means you could get money back and not just a subtraction of taxes owed.
The 2020 Child Tax Credit Amount
With tax reform, the Child Tax Credit was increased to $2,000 per qualifying child and will be refundable up to $1,400, subject to income phaseouts. This is up from the prior $1,000 amounts. And previously, the Child Tax Credit was only refundable if you filed for the “Additional Child Tax Credit”.
The Child Tax Credit amount that may be refunded is equal to 15% of earned income (see my post on the earned income tax credit, which can be claimed separately as well) above $2,500. That amount is capped, and subject to income phaseouts (more on those below).
The 2021 Child Tax Credit Amount
As a result of the American Rescue Plan Act of 2021, the 2021 Child Tax Credit was significantly expanded for a number of American families.
- For 2021 only (at this time), the credit was increased to $3,600 for children under age 6 and $3,000 for children age 6 to up to 17 (was previously 16).
- The increased credit phases out for Individuals with an AGI exceeding $75,000, Married Filing Jointly exceeding $150,000, and Head of Household exceeding $112,500.
- For those eligible, the credit is now fully refundable, which means you get the credit even if owe zero tax and there is no earned income requirement.
- Payments will be made “periodically” (likely each month) starting in July 2021, with any remainder credited on 2021 tax returns.
2020 Child Tax Credit Income Levels & Phaseout
Phaseouts, which are not indexed for inflation, will begin with a modified adjusted gross income (MAGI) of more than $400,000 for married taxpayers filing jointly and more than $200,000 for all other taxpayers.
2021 Child Tax Credit Income Levels & Phaseout
As a result of the American Rescue Plan Act of 2021, phaseouts for the increased credit are an AGI of $75,000 for Individuals, $150,000 for Married Filing Jointly, and $112,500 for Head of Household. If over those income levels, phaseouts for the standard credit will begin with a modified adjusted gross income (MAGI) of more than $400,000 for married taxpayers filing jointly and more than $200,000 for all other taxpayers.
How Do I Claim the Child Tax Credit?
If you have a qualifying child, you will need to file a tax return in order to claim the credit, even if your income level falls below the minimum income to file taxes threshold.
In addition to filling out the appropriate lines in your 1040 form, you will also want to submit IRS Schedule 8812.
The best tax software will help you fully take advantage of the Child Tax Credit through the software questionnaire and resulting paperwork. Here are my favorites:
New $500 Additional Dependent Credit
There is also a new $500 nonrefundable credit for other qualifying dependents (for example, older adults). If you provide half the financial support for a parent or grandparent, stepparent, aunt or uncle, niece or nephew, in-laws, or someone who lives in your home all year long, you may be able to qualify for this $500 credit, as long as the dependent doesn’t earn more than $4,300 (2020). These dependents may include dependent children who are age 17 or older at the end of 2020.
The qualifying dependent must be a U.S. citizen, U.S. national, or U.S. resident alien. The credit is calculated with the Child Tax Credit in the form instructions. The total of both credits is subject to a single phase out when adjusted gross income exceeds $200,000, or $400,000 if married filing jointly.
What is a “Qualified Child” for the Child Tax Credit?
A qualifying child for this credit is someone who meets the qualifying criteria of six tests: age, relationship, support, dependent, citizenship, and residence.
- Age Test: To qualify, a child must have been under age 17 – age 16 or younger – at the end of the year.
- Relationship Test: To claim a child for purposes of the Child Tax Credit, they must either be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals (includes your grandchild, niece, or nephew). An adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption.
- Support Test: In order to claim a child for this credit, the child must not have provided more than half of their own support for the year.
- Dependent Test: You must claim the child as a dependent and that you provided at least half the child’s support during the tax year.
- Citizenship Test: To meet the citizenship test, the child must be a U.S. citizen, U.S. national, or U.S. resident alien.
- Residence Test: The child must have lived with you for more than half of the tax year. There are some exceptions to the residence test, which can be found in IRS Publication 972, Child Tax Credit.
- Social Security Test: Beginning with tax year 2018, your child must have a Social Security Number issued by the Social Security Administration before the due date of your tax return (including extensions) to be claimed as a qualifying child for the Child Tax Credit or Additional Child Tax Credit. Children with an ITIN can’t be claimed for either credit. If your child’s immigration status has changed so that your child is now a U.S. citizen or permanent resident but the child’s social security card still has the words “Not valid for employment” on it, ask the SSA for a new social security card without those words. If your child doesn’t have a valid SSN, your child may still qualify you for the Credit for Other Dependents. If your dependent child lived with you in the United States and has an ITIN, but not an SSN, issued by the due date of your return (including extensions), you may be able to claim the new Credit for Other Dependents for that child.
There is a qualifying child questionnaire on the IRS website to help you determine eligibility, if you are unsure or want to double-check.
Can you Claim a Child Tax Credit in the Year the Child was Born?
After looking at the ‘residence test’ above, I was left wondering whether or not you could claim the Child Tax Credit in the year the child was born if the child was born in the second half of the year. Publication 972 lists this as one of the exceptions in which you can claim the credit:
A child is considered to have lived with you for more than half of 2020 if the child was born or died in 2020 and your home was this child’s home for more than half the time he or she was alive.
Tax Credits for Child Care