Smart Money Podcast -Savings Tips and Updates to the Child Tax Credit

Savings Tips and Updates to the Child Tax Credit

As a part of the relief packages announced by the U.S. Government during the Coronavirus outbreak, several welcome changes have been introduced to the Child Tax Credit (CTC) as well. Here, we will discuss the new updates to the CTC and other related things you must know if you are looking to make the best use of it.

Let’s start then..

What are the Latest Updates to the CTC?

Effective from March 2021, the tax credit per qualifying dependent was increased from $2,000 to a maximum of $3,600 for children less than 6 years of age. For the rest of the qualifying children till the age of 18, this amount was increased to $3,000. Also, for the first time 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 are asked to reconcile the credit with their 2021 returns. In case of any discrepancy in Letter 6419, he is asked to visit his IRS account for the latest information and necessary reconciliation.

What are the Eligibility Criteria to Avail the CTC?

A) Income Criteria

As per the revised qualification criteria, for the tax year 2021, you can avail the CTC if your modified Adjusted Gross Income ( AGR) is below $75,000- if you are a single filer. This maximum limit of modified AGR is fixed at $150,000 for married & joint filers and $112,500 for heads of household.

B) Other Criteria

  • You must have lived in the U.S. for at least 6 months during the tax year. For the joint filers, anyone between the taxpayer or his/her spouse must have possessed a main home in the U.S. for at least 6 months during the year.
  • The child must have lived with you for at least 6 months during the year 
  • You must have taken care of a minimum of 50% of the child’s support in the last year
  • The dependent child is not allowed to file a joint return.

How will the CTC be Disbursed to the Taxpayers?

The credit will be disbursed in phases as shown below-

  • 1st phaseout: 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 might be reduced by $50 approximately, for each $1,000. However, the credit cannot be reduced below $2,000/child.
  • 2ndphaseout: if your income is over $400,000 (for married & joint filer) or $200,000 (for all other filers). It will dock $50 for each $1,000 and will also reduce the credit amount per child to below $2,000. You may not be allowed to avail the credit altogether

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 of age 17 or below, you are entitled to get a maximum of $250 per month, per child. In the case of dependent children of age 5 or below, you may have got a maximum of $300 per month, per child.

The advance payments are considered a prepayment of the credit you would 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 (such as filing status, residency status, custody arrangements, or income) has changed in 2021, you may have received more in advance than you were eligible for. If so, you should report it to the IRS as an additional income tax on your 2021 tax return.

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Frequently asked Questions

What is the Child Tax Credit (CTC)? What are the Income criteria to avail the CTC?

The CTC is an annual tax credit. Taxpayers with dependent children only can avail this. It was introduced by the Taxpayer Relief Act of 1997. 

As per the revised qualification criteria, for the tax year 2021, 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 the modified AGR is fixed at $150,000 for married & joint filers and $112,500 for heads of household respectively.

How much CTC a Taxpayer can get for the Tax Year 2021?

For the year 2021, a taxpayer can get a CTC of:

🔹 A maximum of $3,000 for each of the dependent children aged 17 or below, as on 31st Dec, 2021.
🔹 A maximum of $3,600 for each of the dependent children aged below 6 years as on 31st Dec, 2021.

Are the Monthly CTC Payments Taxable?

The child tax credit is not considered a taxable income. It is a credit only.
However, if you discover that you were disbursed more advanced than you were eligible for, you should report it to the IRS as an additional income tax on your 2021 tax return. This additional tax will either increase your tax bill or decrease your refund.

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