It has been estimated that the 2021 child tax credit is going to lower the number of children living in poverty in the U.S. by 45%. That is an unprecedented impact during one of the most challenging times in history. But, is it going to help you? If yes, how can you get this tax credit?
Let’s explore the answers to these questions in this blog.
Starting with what is the child tax credit?
It is a tax benefit provided to U.S. taxpayers for each qualifying dependent child. Though child tax credit is not something new, the American Rescue Plan Act of 2021 has considerably extended the benefit given to taxpayers to support their families.
Starting with what is the child tax credit?
On a dollar-for-dollar basis, the child tax credit reduces the tax liability of taxpayers. You need to learn about these key takeaways from the recent legislation signed by Joe Biden:
- The maximum annual credit in 2020 was $2,000 per child (under 17 years), and in 2021, it has been increased to $ 3,000 per child ( under 18 years age) and $3,600 ( under 6 years age)
- Unlike the 2020 tax credit, which was only partially refundable, the 2021 tax credit can be refunded fully
- Also, there is a provision to distribute the tax credit to the eligible taxpayers in the form of advance payments every month from July 15, 2021
- Children eligible for this tax credit are legal dependents — U.S. citizens, U.S. nationals, or U.S. resident aliens
- As this tax credit is focused on helping taxpayers of low- to middle-income, high-income taxpayers have been phased out
- Those parents who are eligible for the Child Tax Credit in 2021 but didn’t have to file taxes for 2020 should provide their information through IRS’s new Child Tax Credit Non-filer Signup Tool. Only after this, they would be able to get child tax credit payments from July 2021
- Starting July 2021, the Internal Revenue Service (IRS) would give advance payments of child tax credits of up to $250 ( under 18 years) or $300 ( under 6 years) per child. This payment could possibly be made on a monthly basis
- Taxpayers who are eligible for the 2021 child tax credit and want to get advance payment need to confirm direct deposit details for their bank accounts with the IRS
Who is eligible for the child tax credit 2021?
Before you can claim your child tax credit in 2021, you need to satisfy two different sets of qualifications — eligible taxpayer and eligible child — as per the tax-law requirements.
Do you qualify for the child tax credit as a taxpayer?
As long as your child meets the required eligibility criteria, the taxpayer is subjected to the following rules to receive a child tax credit:
- The child tax credit can be claimed by only one taxpayer even in an instance when, during the tax year, the qualifying child spends time between more than one household
- The tax credit is usually claimed by the parent who has the primary custody of the child
- If you have joint custody of the child, both the parents need to discuss and agree on when each parent will claim the tax credit. For instance, it can be alternate years or some other arrangement.
- Apart from qualifying for the tax credit as per the income, relationship, and other tax law requirements, the taxpayer and the eligible dependent(s) need to have Social Security numbers before the due date of the taxpayer’s tax returns and should report the tax credit same on the return.
- In cases of any fraudulent claims by the taxpayers, the taxpayer will be ineligible to make any claim for such credit for 10 years
- Any taxpayer who has been identified to have made an incorrect claim because of reckless or intentional disregard of tax laws and regulation (but not fraud) will be denied any child credits for two years
Does your child qualify for the child tax credit?
The following are a few parameters/factors that determine whether you get the child tax credit in 2021:
Age:
For a parent to be eligible for the child tax credit 2021, the concerned child should be under the age of 18 at the end of the tax year of which you claim the credit.
Relationship:
You are eligible to receive the child tax credit if the concerned child is:
- Your own child
- A stepchild
- A foster child placed with you by a court or authorized agency
- An adopted child – treated by law as your own child would include any child lawfully placed with you for legal adoption — may not be final by the end of the tax year
- Brother or sister, stepbrother, or stepsister
- Descendants of any of these above mentioned qualifying people — grandchildren, nephews, and nieces— provided they meet all the other tests
Support:
You will be qualified under this law only if, during the tax year, your child does not provide for more than half of his or her own financial support.
Dependent:
To get this benefit, on your tax return, you should claim the said child as a dependent. Your child can be claimed as a dependent if he or she must be:
- Your child— biological, foster, or adoptive, grandchild, sibling, niece, or nephew
- 18 years or under, or below the age of 24, who is for at least five months of the tax year a full-time student, or is permanently disabled, irrespective of the age of the child
- A child who has lived with the taxpayer for more than half the tax year
- Have paid for not more than half of his or her own support during the year
Citizenship:
You can claim the child tax credit only if the child is:
- A U.S. citizen
- A U.S. national – For tax purposes, U.S. national is defined as individuals who were born in:
- American Samoa or
- the Commonwealth of the Northern Mariana Islands.
- A U.S. resident alien
Residence:
As per this eligibility criterion, the said child should have lived with the taxpayer for more than half of the tax year the taxes. However, this rule is subject to a few exceptions like:
- Any child who took birth or died during the tax year will be considered to have lived the whole year with you
- Under special circumstances, temporary absences by you or the child for medical care, business, school, military services, or detention in a juvenile facility will be accounted as the time the child lived with you
- As per Form 1040, the law has given a few exceptions to the residency test for children of separated or divorced parents
Family income:
The amount of Child Tax Credit you would receive depends on your modified adjusted gross income (MAGI) above certain amounts, which are ascertained by your tax-filing status. If you are above a certain level of income, calculated according to this method, your child tax credit may reduce.
Are you eligible for the child tax credits and don’t know how to claim it? We can help you with your professional tax services. To learn more about our services, get in touch with us today.