7 Important Child Tax Credit Requirements You Should Know - Tax Professionals Member Article By Dennis Jao
Posted by Dennis Jao

7 Important Child Tax Credit Requirements You Should Know

7 Important Child Tax Credit Requirements You Should Know

If you have kids or other dependents under the age of 17, you may be eligible for the child tax credit. It was extended as part of the American rescue plan, which was signed by President Biden in March 2021, as part of a US government effort to help families cope with financial hardship caused by the COVID-19 pandemic. Direct cash payments began on July 15. Since your family's financial planning goes beyond taxes, consider working with a local financial advisor to optimize your plans.


What is the child tax credit?

The Child Tax Credit (CTC) is intended to increase the income of parents or guardians of children and other dependents. The American rescue plan has lifted the CTC until 2021 only to help taxpayers cope with the effects of the pandemic. It applies to dependents aged 17 or under on the last day of the fiscal year. The credit's value is up to $3,600 per dependent for fiscal 2021, but your income level determines just how much you can earn. In previous years, the credit was $2,000 per dependent.

The CTC phases out for wealthier families. The expanded tax credit is gradually reduced to $75,000 (modified adjusted gross income) for single or married taxpayers who file a separate tax return, $112,500 for heads of household, and $150,000 for joint filers or those who are eligible widows or widowers. Depending on the filing status, the CTC is typically cleared at $200,000 or $400,000.

The Child Tax Credit will not start dropping below $2,000 per child until your adjusted gross income in 2021 exceeds $400,000 if you are married filing jointly or $200,000 for all other filing statuses. The second phase out reduces the CTC by $50 for each $1,000 (or fraction thereof) for which the amended AGI exceeds the relevant income threshold.

For 2021, the CTC is fully refundable. It's different from previous years, where it was only reimbursable up to $1,400. For 2021 taxes, that means if you qualify for the CTC and the tax payable is less than zero, the IRS will send you the remaining amount.

The Internal Revenue Service (IRS) began monthly payments from July through December on the 15th of each month. Half the credit amount will be paid in advance, and households will claim the other half in the 2022 tax return.

Note that tax credits directly reduce the amount owed to the IRS. So if your bill is $4,000, but you qualify for $1,000 tax credits, your bill is now $3,000. This is totally different from a tax deduction, which reduces the amount of income subject to income tax.


The seven main requirements of the 2021 child tax credit:

Eligibility for the CTC depends on several factors. The child you claim to be your dependent must meet seven IRS criteria:

  1. Proof of age/age test: The child was under 18 at the end of the exercise. The CTC increases for children under six years old.

  2. Proof of child support/Support test: The child has not provided more than half of his/her support during the fiscal year. The minor cannot file a joint return for that year either.

  3. Proof of Citizenship and Resident/Resident test: The child must be US citizens, US nationals, or aliens residing in the United States. The child must also have an SSN (social security number).

  4. Proof of Income/Income test: These are the same requirements as listed above. In summary, the CTC is being phased out for households with incomes over $75,000 (single taxpayers), $112,500 (heads of households), or $150,000 (joint filers).

  5. Proof of Residence/Residence Test: The child must have lived with you for more than half of the tax year.

  6. Proof of the dependent/dependent test: The child must be declared dependent on your federal income tax return.

  7. Proof of the relationship/relationship test: the child is the daughter, the son, the stepson, the adopted child, the stepbrother, step-sister, the half-sister, or the half-brother. Also, the child can be a direct descendant of one of your grandchild, nephew, or niece.


How to claim and track your child's tax credit

Here are the things to note before claiming your child's tax credit. Eligible taxpayers can claim the CTC on Form 1040, line 12a, or Form 1040NR, line 49. You can talk to a tax expert to help you determine exactly how much credit you are entitled to. If you need to file a year before 2018, you can only claim a credit on Form 1040, 1040A, or 1040NR.

Eligible recipients who have not received the correct amount or who have not received anything should verify their information on the Internal Revenue Child Tax Credit Update Portal. In cases where the portal indicates that payment has already been made but not received, a follow-up or fund tracing request can be made by sending or faxing the 3911 form to the agency.

There may be a late payment, depending on the payment method. The IRS says you can track payments:

  • Four weeks after payment, sent by check to a standard address

  • Five days from the date of deposit and the bank says that it has not received payment

  • Six weeks after receipt of payment by post and with a delivery address registered at your local post office.

  • Nine weeks after sending the payment and you have a foreign address

 

Other credits for children and dependents

Many other federal and state provisions help families caring for children and other dependents.


Additional Child Tax Credit (ACTC)

This credit actually gives you a refund if the CTC has reduced your tax to less than zero. (Please note that the CTC was previously non-refundable). The CCTA has been largely removed, but if you need to apply for a fiscal year before 2018, you can find information about the CCTA on Form 1040.

Beginning in fiscal 2018, there is an additional credit of $500 for other dependents (ODC). This allows you to apply for dependents who are not children, such as a parent, and dependents who are students (under 24). The eligibility requirements are very similar, but it is impossible to apply for the ODC for a dependent eligible for the CTC.


Child and dependent care tax credit (CDCTC)

You can also apply for this credit if you have income and pay someone else to care for a dependent. Unlike the CTC, for which you can only apply if you are a parent or guardian of the minor, you can apply for the CDCTC for elderly parents and other relatives with disabilities. The dependents eligible for the CDCTC are:

• A child up to 12 years old at the end of the fiscal year

• Adult dependent family members or spouses who are unable to care for themselves due to a mental or physical disability unless they have a gross income of $4,150 or more.

With the CDCTC, you can apply for a credit of up to 35% of your eligible, qualified costs. The exact percentage you can deduct depends on your income level. The maximum support costs that can be claimed are $3,000 if you have one dependent and $6,000 if you have multiple dependents. This means that the largest possible credit is $1,050 with one dependent and $2,100 with a multiple. The CDCTC is not refundable. According to the IRS, eligible expenses for the CDCTC include money paid "for household chores and the care of a qualified person while working or looking for work." Child support payments are not eligible. To apply for the CDCTC, you must complete form 2441.


State Credits

Some states offer additional state-level CTCs and/or CDCTCs that match all or part of your federal credit. In some states, the credits are repayable, and in others, they are not.

 

Conclusion

The IRS provides child tax credits to help parents and guardians offset some of the costs associated with raising a family. If you have a dependent other than your direct child, you may also be eligible for a credit. And because some child tax credits are refundable, you might even make some money in the end.

Please note that the information on the Child Tax Credit may change from year to year. In turn, it is important to know the laws in effect each fiscal year so that you know what to expect.


FOR MORE INFORMATION ON HOW DENNIS JAO CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.


THANKS FOR VISITING.


Dennis Jao
Contact Member