The child tax credit isn't anything new, but it has undergone significant changes in the past year. It received a major overhaul in the American Rescue Plan Act of 2021, and that resulted in a larger credit and monthly advance payments to millions of families. Those payments ended in December, but some in Washington still hope to make an enhanced credit permanent. Meanwhile, others think the credit has become too generous.
"It's political at this point," says Benjamin Bohlmann, tax partner in the Miami office of accounting firm Friedman LLP.
While lawmakers debate the policy behind the child tax credit, families may be left wondering what happened to the monthly payments and how much they can expect to receive when filing their 2021 tax return.
Keeping reading for answers to those questions and other essential information about the child tax credit.
What Is the Child Tax Credit?
Originally enacted as part of the Taxpayer Relief Act of 1997, the child tax credit was initially a $500 nonrefundable credit that could be applied by eligible families toward their federal income tax bill. Over the years, it has been expanded multiple times, reaching its highest point in 2021.
"Last year it was amped up significantly, and the number of people who were eligible was expanded," Bohlmann says.
How Much Is the Child Tax Credit?
A tax credit reduces the amount of taxes owed dollar for dollar. When it comes to the child tax credit, the amount a family receives depends on the year in question and whether advance payments were received.
When families who did not receive advance payments file their 2021 tax return -- that is the return due in April 2022 -- they will receive a $3,000 tax credit for each qualifying child younger than age 18. Children who are younger than age 6 will qualify for a $3,600 tax credit. When families who did receive advance payments file their 2021 tax return, they will receive half of the credit owed to them. That's because the other half should have already been paid in the form of six monthly installments in 2021.
In 2022, the credit dropped to its previous level of $2,000 per qualifying child younger than age 17. Older dependents, including 17- and 18-year-olds as well as college-age children, should be eligible for a $500 credit.
"They look at Dec. 31 of the (tax) year for the age," says Matt Schwartz, a certified financial planner with Great Waters Financial in Minnetonka, Minnesota.
Changes to the 2021 Child Tax Credit
As people prepare to file their 2021 tax returns, they should be aware of several significant changes to the child tax credit made by the American Rescue Plan Act. These include:
-- Increased credits of up to $3,000 per qualifying child between the ages of 6-17 and up to $3,600 per qualifying child younger than age 6.
-- Expansion of the credit to include 17-year-olds.
-- Advance payments toward the credit during the second half of 2021.
What's more, the credit became fully refundable for 2021, says Bill Smith, managing director in the national tax office of accounting firm CBIZ MHM. "Previously, it was nonrefundable," he explains. As a result, families who don't owe any taxes could still receive a refund of the credit.
What Happened to Advance Payments for the Child Tax Credit?
A notable provision of the American Rescue Plan Act was that it instructed the IRS to make advance payments to families who were expected to be eligible for the credit. These payments were equal to half a family's expected credit -- approximately $250 to $300 per child -- and sent monthly. There was also an option for parents to opt out of the payments.
"It was an element of a huge economic response," Bohlmann says. The advance payments were intended to not only assist families struggling financially during the COVID-19 pandemic but also to pump more money into the economy.
However, like the expanded credit amount, the provision for advance payments ended on Dec. 31, 2021. The monthly advance payments have ended and will not resume unless legislative action is taken.
Will Child Tax Credit Advance Payments Affect My Taxes?
They could. When people file their 2021 taxes in 2022, they will need to reconcile the payments they received against the credit they are owed. If their income increased substantially or they can no longer claim a child for a credit, they may have to repay some or all of the excess payments received.
"You can keep up to $2,000 in overpayments (per child)," Schwartz says. Full repayment protection is only available to those with adjusted gross incomes below a certain threshold though.
That threshold is set at $60,000 for married couples filing jointly. After that, the protection begins to phase out and disappears entirely once income reaches $120,000 for joint filers. Income limits are lower for those with filing statuses of single, head of household or married filing separately.
If you lose some or all of the credit, it could cause other problems too. "It's possible you could get an underpayment penalty," Smith says. That could happen if you changed your withholdings or reduced quarterly tax payments in anticipation of receiving a large child tax credit.
Who Is Eligible to Claim the Child Tax Credit?
Taxpayers must meet income requirements to claim the child tax credit. For the 2021 tax year, there are separate thresholds for the regular $2,000 child tax credit and the additional $1,000 or $1,600 tax credit offered under the American Rescue Plan Act.
A person's adjusted gross income, or AGI, must fall below these thresholds to receive the full child tax credit for 2021:
-- $200,000 for single filers and $400,000 for those married filing jointly to receive the normal $2,000 child tax credit.
-- $75,000 for single filers, $112,500 for heads of household and $150,000 for those married filing jointly to receive the additional $1,000 per child age 6-17 and $1,600 per child younger than age 6.
Those with incomes above this amount will see their credit decline $50 for each $1,000 in income earned above the threshold amount.
Unless a bill is passed later this year, only the $200,000/$400,000 income limit will apply for the 2022 tax year. That's because the child tax credit is dropping to $2,000 for the year.
Beyond the income requirements, a child must live with you at least half the year, have a Social Security number and rely on you for support to be claimed for a credit.
How Can I Claim the Child Tax Credit?
To receive a child tax credit, you'll have to file a federal tax return. Those who received advance payments in 2021 will also need to file a federal tax return to reconcile the amount they received with the amount they were due.
If the IRS determines someone recklessly or intentionally disregarded the rules when filing for a child tax credit, the taxpayer will be banned from claiming the credit for the next two years. If it's found a credit was issued due to fraud, a taxpayer will be banned from claiming the credit for 10 years.
Most tax software programs will walk you through the qualifications for the child tax credit and so long as you are entering information accurately and completely, you shouldn't run afoul of the rules. However, if you have any questions, talking to a tax professional is advisable.
What if I Forgot to Take the Child Tax Credit Last Year?
If you forgot to claim a child tax credit, you can go back and amend your previous return to receive it. However, your child must have had a Social Security number issued by the due date of the return to receive the credit.
Will the Larger Child Tax Credit Be Made Permanent?
That seems unlikely right now. Without more support in the Senate, there aren't enough votes to permanently increase the child tax credit.
Still, it's not out of the question. "I suppose it's possible to make something retroactive or make it a standalone provision," Smith says. But so far, no one is talking about that in Washington.
Instead, an expansion of the child tax credit seems to be currently off the table. While it was included as a provision in the proposed Build Back Better Act, Senator Joe Manchin -- a key vote to its passage -- is opposed to keeping the credit at the higher 2021 levels.
As a result, parents who got used to receiving those advance payments last year will need to adjust their budgets to do without the extra money this year.