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Understanding the Child Tax Credit

Raising children is an expensive endeavor. The cost of food, clothing, childcare, and other necessities can certainly take a toll on a family’s budget. That’s why Congress created the Child Tax Credit (CTC) as part of the Taxpayer Relief Act of 1997 to help lessen the financial burden. Over the years, however, the credit has changed. Even now, House Democrats are pushing through new legislation that would significantly alter the credit from its current state.

According to the Joint Committee on Taxation, more than 48 million filers will claim the Child Tax Credit on their returns this year. If you’re a new parent or this is your first time filing taxes, it helps to understand how the Child Tax Credit works and what could be changing soon.

Current Child Tax Credit (CTC)

Due to the tax changes under the Tax Cuts and Jobs Act of 2017, the Child Tax Credit can now reduce your federal income tax by up to $2,000 per qualifying child. Unlike tax deductions, which only lower your taxable income, this tax credit lowers the amount of taxes you owe dollar for dollar. Up to $1,400 of the tax credit is also refundable. There are, of course, some requirements you must meet to take the credit, including who qualifies as a dependent and how much you can claim based on your income.

Dependent Eligibility Requirements

If you have children under the age of 17, you will likely qualify for the Child Tax Credit as long as they meet the following six requirements:

  1. Age. The child was 16 or younger at the end of the tax year.
  2. Relationship. The child is your biological, adopted, or foster child. Stepchildren are also eligible. Other eligible dependents include siblings (step, half, or full), nieces, nephews, and grandchildren.
  3. Dependent. The child will be claimed as a dependent on your IRS tax return.
  4. Support. The child did not provide more than 50% of their living expenses (support). They are also restricted from filing a joint return if you claim the credit.
  5. Citizenship. To be eligible for the credit, the child must be a U.S. citizen, U.S. National, or a U.S. resident alien with a valid Social Security number.
  6. Residency. The child lived with you for six or more months during the tax year.

If your dependent children are between the ages of 17 and 24, you are not eligible for the CTC. You may, however, qualify for the $500 Credit for Other Dependents (ODC).

Income Thresholds

You must earn at least $2,500 in income to qualify for the CTC. To receive the full credit, your income levels must not exceed the following limits:

  • Single or Head of Household – $200,000
  • Married Filing Separately – $200,000
  • Married Filing Jointly – $400,000

For income levels above these thresholds, the amount of the credit will be reduced by $50 for every $1,000 above the limit, or by 5% of the modified adjusted gross income (MAGI) above the threshold. For example, a married couple with one child filing together would completely phase out of the credit at $440,000.

Child Tax Credit Amount

In 2019, the average Child Tax Credit for taxpayers was $2,370. Those who earned between $100,000 and $200,000 received the largest average credit at approximately $3,040. The amount you receive, however, depends on your income level and the number of qualifying children you can claim.

average child tax credit amounts

If your income is under the given threshold for your filing status, you’ll receive 100% of the CTC ($2,000 per child) up to the amount you owe in taxes. You may also qualify for a refundable credit of up to $1,400, per child, even if you do not owe any tax. This is known as the Additional Child Tax Credit (ACTC). To determine your ACTC amount, if any, use Schedule 8812 (Form 1040).

Due to the coronavirus pandemic, you can elect to use your 2019 income or 2020 income to calculate the tax credit, and use whichever one will give you the bigger tax break. Be sure to crunch the numbers for both, especially if you anticipate qualifying for the ACTC. You can use the IRS Child Tax Credit and Credit for Other Dependents Worksheet to determine your credit amount.

Proposed Changes to the Child Tax Credit

In an effort to dramatically reduce child poverty in the United States, Democrats have proposed changes to the Child Tax Credit as part of most recent stimulus package, including:

Increased Credit Amount

If approved, the credit amount would increase from $2,000 to $3,000 for qualifying children between the ages of 6 and 17 (currently only children 16 or younger qualify). The credit jumps to $3,600 for children under the age of six.

Increased Refundable Amount

Currently, taxpayers may only receive up to $1,400 as a refundable credit. It also requires some math skills to determine the credit amount. The new bill would simplify the process by making the entire CTC amount refundable.

New Phase-Out Limits

Although the credit amount increases, the income thresholds would significantly decrease under the proposed legislation.

proposed child tax credit income limits

Get Paid Now, Not Later

Another change is the proposed advance payments of the credit to taxpayers. Families with children between the ages of 6 and 17 would receive $250 per child each month. Those with children under 6 would receive $300 per month per child. The monthly payments, similar to the annual credit, would gradually phase out for those exceeding the new income thresholds. If approved, payments could begin in July and would continue through the remainder of the year.

Although these changes to the Child Tax Credit would be temporary and set to expire after 2021, there is support for extending the increased amounts and monthly payments for additional tax years.

Need Help?

If you need help determining your eligibility for the Child Tax Credit, Additional Child Tax Credit, or other dependent credits, be sure to contact Tax Defense Network. We offer affordable tax preparation fees for individuals and small business owners. Call 833-803-4222 to schedule your free consultation today!