What Is the Child Tax Credit and How am I Affected?

The American Rescue Plan, passed in March in response to the economic fallout of COVID-19, expanded elements of the Child Tax Credit program, notably providing advanced payments. The U.S. Department of the Treasury and the Internal Revenue Service (IRS) said that about $15 billion was paid to families of almost 60 million eligible children in the first monthly payment on July 15.

The expansion of the Child Tax Credit (CTC) is said to benefit about 2.3 million children in Pennsylvania, lifting about 100,000 out of poverty.

The CTC is a tax benefit given to American taxpayers for their qualifying dependent children. The credit is designed to help low-income and middle-class taxpayers support their families by decreasing the taxpayers’ tax liability dollar-for-dollar.

Qualifying for the Child Tax Credit

To qualify for the tax credit, your income must fall within certain parameters and your child must also meet certain requirements. In addition to children, stepchildren, and adopted children, other family members may also qualify if you provided more than half of their financial support during the tax year. Foster children can also qualify. Children must be U.S citizens, nationals, or resident aliens.

Changes to the Child Tax Credit

The changes to CTC were implemented to ease the financial pressure on American families. One of those changes expands the CTC from $2,000 per child to as high as $3,600 for the 2021 tax year.

• $3,000 for each dependent child aged 6-17
• $3,600 for each dependent child under age 6

Half of the credit amount is paid in advance in monthly installments, and the other half will be claimed by families on their tax returns next year.

Families can get $250 to $300 a month per child from July 2021 through December 2021. Only one parent/guardian receives the payment. The funds will be sent the same way you receive your tax refund and stimulus payments.

Here are two helpful resources related to the Child Tax Credit:

• The IRS offers an online assistant to check whether you qualify for the advanced tax credit. To use the assistant, you will need your tax return files for 2020 or 2019 if you didn’t file in 2020.
• This 2021 child tax credit tax calculator can help you determine how much your CTC will be on your 2021 tax return.

In the past, only up to $1,400 was refundable, but the American Rescue Plan makes the CTC fully refundable for the 2021 tax year, during which there will be no minimum income qualifications. Previously, a taxable income of at least $2,500 was required to qualify for the CTC.

The increased payment is phased out for wealthier families beginning at $75,000 for single returns, $112,500 on head of household returns, and $150,000 on joint returns. For every $1,000 earned above the limit, $50 will be deducted from your payment.

The previous credit of $2,000 per child is still available up to an income limit of $400,000 for married couples and $200,000 for individuals.

Congress and the president will have to pass new legislation to make these changes permanent.

Child Tax Credit and Benefits Eligibility

The advanced payments you receive will not be categorized as income in determining whether you qualify for federal benefits. Pennsylvanians’ eligibility for Medicaid, disability benefits, the Supplemental Nutrition Assistance Program (SNAP), Temporary Assistance for Needy Families (TANF), or other needs-based federal benefits will not be impacted by the payments.

Child Tax Credit and Wage Garnishment

Your CTC cannot be garnished for any federal debts like federal student loans, back taxes, or back child support. The payments are not protected from garnishment by private debt collectors like credit card companies and health providers. That said, if you get a refund when you file your 2021 taxes, any remaining amount from the CTC included in the refund could be used to offset tax debts.

Child Tax Credit and Your Taxes

The advances that a parent receives can affect your taxes next year. The IRS is relying on previous tax returns to determine how much to pay you in CTC each month. Former tax returns may not have the most updated information on your income or number of children. In those cases, you could receive payments when you are no longer eligible or less money than you are entitled.

If you receive more CTC than you are eligible for, you will have to repay that money. One reason you might be overpaid is if your 2020 income during the pandemic qualified you, but your 2021 income was higher and would disqualify you. Any tax credit, though, isn’t counted as taxable income.

If you think it’s possible that your eligibility has decreased, you might consider declining the advanced monthly payments. The IRS has an online portal where you can opt out of receiving the monthly payments. Doing this does not prevent you from claiming the child tax credit on your 2021 income tax return and taking advantage of the expansion. You simply won’t receive the monthly payments.

Tax Advice and Return Preparation

At Scaringi Law, we have 18 attorneys and six locations in central Pennsylvania to serve a variety of legal needs, including tax law. If you have questions about how CTC affects your tax liability, don’t hesitate to contact us.

We are available by phone at (717) 775-7195 and also online.