Confused About the Child Tax Credit? Here’s How to Prepare your Taxes

Major changes to the child tax credit have a lot of people anxious about filing this year. So, we thought we’d help by explaining how to best prepare your taxes in light of 2021 developments. 

First, if you received the advance payments of the child tax credit, ask yourself these 3 questions:

  1. Did I make more money in 2021 than in 2020?
  2. Did my number of qualifying children decrease from the previous year?
  3. Did my filing status change? (i.e., from joint filing to single or head of household)

If the answer is yes to any of these, then you may have received too much in advance child tax credit payments. But like with anything, the devil is in the details. Before we explain how to prepare your taxes for these changes, let’s review the 2021 Child Tax Credit history. 

 

Changes to The Child Tax Credit 2021

In July 2021, parents received the child tax credit in a completely new way. They received it in monthly advancements. In prior years, the IRS issued child tax credits with tax filer’s refunds. This made determining eligibility and calculating the amount straightforward. 

Covid-19’s prolonged effect on the global economy motivated the Biden administration to find a way to issue additional financial assistance to families fast. So, they increased the child tax credit, expanded it to more people, and started giving advance monthly payments halfway through the year.  

 

Here is the complete list of changes:

 

2020 $2,000 CTC

2021 CTC

Age of child

Children age 16 and under can qualify for the credit

Children age 17 and under can qualify for the credit

Credit Amount

$2,000 per child

$3,000 per child and $3,600 for children under the age of 6

Refund Amount

Up to $1,400 per child is refundable

Fully refundable

Income

You must have earned income more than $2,500 to qualify for the refundable part of the credit

No income requirement, you can have zero income and still qualify for the full credit amount per child

Advance Payments

No advance payments

Periodic advance payments between July to December 2021

Phase Out Rate

The CTC amount will start to decrease at $200,000 for single filers and heads of households ($400,000 for married couples)

The CTC amount will start to decrease at $75,000 for single filers ($150,000 for married couples and $112,500 for heads of households)

 

But instead of using current income and filing information to calculate eligibility and credit amounts, the U.S. Treasury used 2020 and 2019 tax information. This change created the potential for the IRS to overpay millions of families in advance tax credit installments. And what many don’t realize is that if they failed to update their information with the IRS before receiving the credits, they might need to pay a portion back in their 2021 tax return. 

 

How do I Calculate the Total 2021 Child Tax Credit Amount?

Calculating the total child tax credit amount is an essential first step in determining the best way to prepare your taxes. Since monthly installments of the child tax credit advancement started halfway through the year, they only account for 50% of what the IRS thinks they owe you. So, you will only owe the IRS for overpayments if your eligibility for 2021 is less than half of their estimation.  

In 2021, you can receive a maximum child tax credit amount of $3000 per child between the ages of 6 and 17 and $3600 per child under 6. These amounts decrease after certain income levels. But to calculate your total amount, you need to follow these three steps:  

 

Step 1. Determine filing status for 2021.

Only one person or joint filing can claim dependents for the child tax credit. So first, determine how you are filing and if you are the only one claiming your children as dependents. The amount per child starts to decrease after these different filing income thresholds:

  • Single filers: $75,000  
  • Married couples: $150,000
  • Heads of households: $112,500

 

Step 2. Use modified adjusted gross income (MAGI) to calculate the child tax credit amount per child. 

The CTC will reduce by $50 for every $1000 increase in income above the filing threshold. For example, if you are a single filer and your MAGI is 76,000, your child tax credit for your 7-year-old would be $2950. 

These reductions continue until they hit $2000. Once filers hit a second income threshold, their CTC starts reducing again by $50 for every $1000 income increase above these amounts:

  • Single filers: $200,000  
  • Married couples: $400,000
  • Heads of households: $200,000

So, for example, a single filer who makes $201,000 will get $1950 for her 7-year-old. 

Step 3. Multiply adjusted credit amount per qualifying child. 

Unlike the earned income tax credit, there is no limit to the number of qualifying children. You must meet these requirements to qualify a dependent for this credit:

  • Provided at least half of the child’s support during the last year.
  • The child must have lived with you for at least half the year. 
  • You must have lived in the U.S. for more than half the year (or, if filing jointly, one spouse must have had a main home in the U.S. for more than half the year).

 

Once you have verified the number of eligible dependents, simply multiply that number by your eligibility amount to calculate your total 2021 child tax credit. 

For Example: $75,000  (income): 2 (children) x $3000 = $6000

$86,000  (income): 2 (children) x ($3000 – $50) = $5900

$100,000 (income): 2 (children) x ($3000 – $150) = $5700

 

What if I receive more money than I should as part of the advance payments for the 2021 child tax credit?

After calculating the total CTC amount for 2021, you will need to wait for the 6419 letter from the IRS. This will show how much of the CTC the IRS already paid. If you conclude that the advance payments were too high, you may still be able to avoid paying the IRS any repayments. 

First of all, most adjustments in income or filing status will simply result in a smaller CTC refund. Since only half of the CTC was paid in advance, most tax filers are still waiting for the second half. 

Let’s say you are a single filer with one 8-year-old, and your income increased from $75,000 to $190,000. This means that the IRS calculated a total CTC amount of $3000 when you are only eligible for $2000. But since the advance payments only covered half of the CTC, the IRS will deduct the $1000 from your remaining $1500 they were planning to issue in your refund. Thus, any changes in income would need to be drastic to warrant any repayments to the IRS. 

The most likely scenario that would warrant a repayment is if one parent received advance CTC payments, but the other claimed his children as dependents in his 2021 tax return. In this example, the parent who didn’t claim her children may need to repay all of the CTC they received in 2021. 

Secondly, if your number of qualifying children changed in 2021, there is a higher likelihood of owing the IRS because of CTC overpayments. 

For example, say you have two children, one who turned 18 and one who turned 6 in 2021. Since the IRS based your advance payments on 2020 tax info, they would have calculated $6,600 in CTC. This means that you would have received $3,300 in advance payments. But since the 18-year-old no longer qualifies for CTC and the 6-year-old is only eligible for $3,000, your total CTC eligibility would come to $3,000, resulting in a negative $300 balance with the IRS. 

Filers though may be eligible for complete repayment protection if their incomes are under the following levels:

  • Single filer: $40,000
  • Head of Household filer: $50,000
  • Joint filers: $60,000

 

And anyone who falls within the following income levels will be eligible for partial repayment protection:

  • Single filer: $40,000 – $80,000
  • Head of Household filer: $50,000 – $100,000
  • Joint filers: $60,000 – $120,000

When preparing your taxes for changes like the child tax credit, it is vital to keep these figures in mind. Many strategies can help reduce your MAGI to stay within the desired threshold. For example, if you owned or started a business, you can deduct business expenses and losses to lower your MAGI. Our tax consultants can help you think through countless similar strategies.   

 

What if the Child Tax Credit Exceeds Your 2020 Tax Liability?

The great news about the child tax credit is that in 2021, it was made entirely refundable. This means that even if you don’t owe the government any taxes, i.e., zero tax liability, they will still give you the total credit amount. 

Now, you may be eligible for more tax credits. Some are refundable, and others are not.   

For example, you have an elderly relative whose only income is social security. If you provide any kind of assistance, you may be able to claim the other dependent credit of $500. This credit is non-refundable, though. So, if your tax liability is 0, the excess $500 will be lost.

 

To calculate non-refundable and refundable credits together, you need to subtract the non-refundable credits from your tax liability first and then the refundable second. 

Therefore, let’s say that after your itemized deductions, your tax liability came to $400. And you receive both the $500 other dependent credit and $6000 for the child tax credit.  

First, Subtract nonrefundable credits from tax liability ($400 – $500) = ($0)

Second, Subtract refundable credits from tax liability ($0 – $6000) = (- $6000)

Your refund would come to $6000 + any tax withholding you paid throughout the year.

 

Additional Steps to Help Prepare Your 2021 Taxes

Many additional tax credits are going under the radar this year. For example, there is a second child-related credit worth up to an additional $8,000. This credit is called the child-dependent care credit. In previous years, this credit was capped at $2,100, but the Biden administration increased it to incentivize more parents back to work.

This, combined with the earned income credit and others, can help alleviate any overpayments you owe or simply increase your tax refund. Many tax filers complain that automated tax software services are failing to account for all these changes this year. And they are left wondering if they did something wrong or aren’t getting their biggest refund. 

We have created a simple way to file without that confusion and stress but still in the comfort of your own home. Filing with us will get you full access to the best tax consultants, so no elements of the child tax credit are overlooked.   To start, click “File My Taxes” at www.irbinc.com.

 

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