What is Child Tax Credit and How to Claim It in 2022
The Child Tax Credit (CTC) is an annual tax credit that can be availed by taxpayers with dependent children only. It was introduced to the American Taxation system by the Taxpayer Relief Act of 1997. Since then, it has been playing a stellar role in providing financial support to taxpayers with dependent children.
The U.S. Government announced several relief packages in 2021 during the Coronavirus outbreak. Effective from March 2021, the Government announced the American Rescue Plan. As a part of it, the tax credit per qualifying dependent was increased from $2,000 to a maximum of $3,600 for children under 6 years of age. For the rest of the qualifying children till the age of 18, the amount was increased to $3,000. Also, for the first time ever in the U.S., many taxpayers got 50 % of the credit as advance monthly payments from July to December 2021. By the end of January 2022, all recipients of this advance child tax credit received Letter 6419, with a breakdown of all the advance payments disbursed. The taxpayers should reconcile the credit on their 2021 returns. In case the taxpayer feels that the Letter 6419 has some errors, he should visit his IRS online account for the latest information.
Who are Qualified for the Child Tax Credit?
The qualification criteria for the Child Tax Credit have been revised for the tax year 2021. As per this, you can avail of the credit if your modified adjusted gross income is below $75,000 if you are a single filer. This maximum limit of modified adjusted gross income is fixed at $150,000 for married & joint filers and $112,500 for heads of household.
The credit is disbursed in phases as shown below –
- 1st phase out: if your income exceeds the limit mentioned above but is below $400,000 (for married & joint filers) or $200,000 (for all other filers). Here, the total credit per child for you may be reduced by about $50 for each $1,000. However, the credit will not be reduced below $2,000 per child.
- 2nd phaseout: if your income is over $400,000 (for married & joint filer) or $200,000 (for all other filers). The phase-out will dock $50 for each $1,000 and will reduce the credit per child below $2,000. You may even be barred from availing of the credit altogether.
Some of the other eligibility criteria to avail of the child tax credit are as follows:
- You must have taken care of a minimum of 50% of the child’s support in the last year
- The child must have lived with you for at least 6 months during the year
- The child is not allowed to file a joint tax return.
- You must have lived in the U.S. for over 6 months during the year. If you are filing jointly, anyone from you or your spouse must have owned a main home in the U.S. for over 6 months during the year.
How much Credit a Taxpayer can get?
For the tax year 2021, a taxpayer can get a child tax credit of:
- Up to $3,000 for every dependent child aged 17 or less on Dec. 31, 2021.
- Up to $3,600 for every dependent child below 6 years of age on Dec. 31, 2021.
If you have availed of the advance payments mentioned above, the IRS may have disbursed 50% of the credit as monthly payments from July to December 2021. If you have dependent children aged 17 or below, you may have got up to $250 per month, per dependent child. If you have dependent children aged 5 or below, you may have got up to $300 per month, per dependent child.
How does the Child Tax Credit affect your Annual Taxes?
For the tax year 2021 onwards, the child tax credit has been made fully refundable. This means, it can reduce your tax burden and you can even have a check on if any tax refund has been left over. The CTC you can claim on the 2021 return depends on if you have opted for advance payments, how much of the advance you have received and your tax-filing circumstances.
If you Received Advance Payments
The Letter 6419 you have received includes a detailed summary of the advance you received against CTC payments. It also mentions the number of dependents for which the advance payments are calculated by the IRS. From this information, you can easily reconcile the credit while filing your return.
If you have Opted Out of the Advance Payments
If you have decided to opt out of the advance payments even before the first one got disbursed in July, you can easily claim the credit on your tax return. While filing, you simply need to confirm your eligibility for the credit. Then you can claim the full amount based on your 2021 income and the number of dependents.
If you do not Normally File Taxes
If you belong to low-income groups and do not normally file a tax return, you can sign up for advance payments with the help of the non-filers sign-up tool provided by the IRS. To claim the full credit or the balance, you will have to file a tax return this year.
Will you Need to Pay Back the CTC?
The child tax credit is not regarded as a taxable income. It is only a credit. This means, it is designed to lower your tax bill or it can be claimed as a refund. However, things will not be that simple if it is discovered that you were overpaid during the disbursement of your advance payment.
The advance payments were regarded as a prepayment of the tax credit you would usually claim in full while filing taxes. But as 50% of the credit was disbursed already, the IRS may have used your latest available return (from the year 2020 or earlier) to find out the monthly amount of the advance payment to send to you. So, if your financial /personal status (filing status, custody arrangements, residency status or income) have changed in the year 2021, you may have received more as advance than you were eligible for. The following scenarios may arise:
- Let us assume that based on your 2020 income, you have received advance payments amounting to $1,500 for your dependent. However, in 2021, your income has got increased significantly and this has made you eligible for a reduced credit only. The excess you have received is called an overpayment.
- Let us assume you are a single filer. Also, you have one dependent that used to live in the U.S. in the year 2020. The IRS then disbursed advance payments to you, depending on that information. However, in 2021, you lived outside the U.S. for over 6 months and this has made you ineligible to avail of the CTC. The advance payment you accepted would be regarded as an overpayment.
If you discover that you were disbursed more advance than you were actually eligible for, you should report it to the IRS as an additional income tax on your 2021 tax return. This additional income tax will either increase your tax bill or reduce your refund.
If you were overpaid, you may also be eligible for something called ‘overpayment protection’ – subject to fulfilling some criteria. This would mean you won’t require to pay the additional amount back to the IRS. To check the qualification criteria, you may visit the IRS website. If you are finding it difficult to reconcile your CTC or to check if you have been overpaid, we would advise you to consult with a professional tax preparer, before the tax-filing deadline arrives.
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