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Important Requirements For a Child Tax Credit That You Need to Know

Important Requirements For a Child Tax Credit That You Need to Know

2021 was a special year for the CTC (Child Tax Credit). In 2022, the credit returns to the previous rules: it will be smaller, partially refundable, and no longer available to low-income Americans.


What is a child tax credit?

The Child Tax Credit is an annual grant given to eligible parents and healthcare professionals to reduce their federal taxes.

The credit is usually requested once a year when filing the tax return. In 2021, President Biden's American Rescue Act temporarily restructured the credit so that more households would qualify and receive a portion of the credit in monthly cash installments.


How Child Tax Credit History Works

The CTC (Child Tax Credit) was last updated by the TCJA (Tax Cuts and Jobs Act) in 2018. In 2021, the credit was temporarily extended by President Biden's Rescue America Act. From 2022 to 2025, the credit will revert to the TCJA form.

According to estimates from the Center for Tax Policy, the temporary extension of the child tax credit has put additional money in the pockets of many families. 92% of families with children receive an average credit of $4,380 for the 2021 tax year.

In the pre-2021 chart, 89% of families with children received an average credit of $2,310.


CTC in 2020 and 2022

The maximum credit is $2,000 per eligible child under age 17. Individuals with an annual income between $2,500 and $200,000 (or $400,000 for married couples) and at least one qualifying child are eligible for the full credit. If you have an income above this level, your credit is reduced.

If your tax bill drops to $0 after claiming the child tax credit, you could receive $1,400 in reimbursement. This is called an additional child tax credit.


Child Tax Credit in 2021

Here are the key changes to the 2021 Child Tax Credit:

  • Any credit not used is fully refundable (except for US taxpayers living abroad)

  • Half of the taxpayer's credit was paid in six monthly installments.

  • The maximum amount was increased to $3,000 per child aged 6 to 17 and $3,600 per child under 6 years old.

  • The maximum total income requirement for the credit was reduced to $112,000 for single parents and $150,000 for couples filing jointly.

  • The minimum income requirement was removed.

  • The remaining half of the taxpayer's credit is claimable when filing the tax return in 2022

To determine eligibility for monthly prepayments in 2021, the IRS had to use income records from the prior year. For this reason, some people may have received advance payments even though they did not qualify for 2021 child tax credit.

When you file tax returns for 2022, the IRS will determine if the tax credits for the credit you received in 2021 were correct. You might be required to send the excess back if you were overpaid. The amount will be debited from your tax account if you qualify for additional credit.


Example of child tax credit

Consider an example: A single mother with an annual income of $70,000 claimed her two children in 2020 and qualified for the CTC. In 2021, the IRS reviewed the previous year's tax return and determined that she is eligible for a renewal tax credit for her kids of $3,600 per child or $7,200. From July to December, she received $600 per month (for a total of half the credit).

When she eventually files her 2021 tax return (in 2022) and indicates the amount she received in monthly payments, the Internal Revenue Service will check her income, the ages of her eligible children, and any other applicable eligibility information to calculate the appropriate credit amount.

If her children were under six at the end of 2021 and her income was less than $112,000 per single parent, she would get the remaining half of the credit ($3,600) applied to her tax bill.


What is child tax credit in 2022

Although the House of Representatives passed legislation to maintain the extended version of the child tax credit for another year, the Senate thwarted the plan.

The Child Tax Credit has now reverted to its previous form for the 2022 fiscal year:

  • All unused credits are refundable up to $1,400

  • The maximum credit is $2,000 per qualifying child under age 16.

  • The maximum total income requirement for the credit is $200,000 for single parents and $400,000 for couples filing jointly.

  • The minimum income required to qualify for the credit is $2,500.


Benefit from the child tax credit

The CTC is for parents or guardians who meet certain income limits and have an eligible child.

An eligible child is usually a dependent with a Social Security number who has lived with the taxpayer for more than half the year. Only one person can claim credit for a child in a given year when the parents are divorced or separated.

For fiscal years 2018, 2019, 2020, and 2022, the child must be at least 16 years old at the end of the year. To benefit from the credit in 2021, the child must be at least 17 years old at the end of the year. They may be biological, adopted, stepchildren, grandchildren, or great-grandchildren.

If you have one or more qualifying children, you must meet the following income requirements to get the full credit:

Filing Status

Tax Year 2021 – Modified Adjusted Gross Income (MAGI)

Tax Years 2018 to 2020, and 2022 – Modified Adjusted Gross Income (MAGI)

Head of Household

$0 to $112,500

$2,500 to $200,000

Married, Filing Jointly

$0 to $150,000

$2,500 to $400,000

 

For income above these limits, the credit is reduced by $50 for every $1,000 until eliminated.


What you need to consider when filing your 2022 tax credits with a child tax credit

There are a few additional steps to claiming the Child Tax Credit when you file your return this year.

In addition to listing the names and SSN of eligible children, you must report the number of monthly advances you received in 2021 if any.

This amount is contained in letter 6419, which the IRS sent to taxpayers in December and January. Also, you can find this information in your online account. Spouses who file taxes together must add their totals and report them on a tax return.

Once the IRS compares the amount of credit you received in 2021 with the amount you should have received, any outstanding balance will be applied to your tax account and may result in a refund. If you are found to have been overpaid, you may need to return the excess to the IRS.

Even if you don't have to file a tax return because your income isn't high enough to pay taxes, you must file one to claim the child tax credit.


Bottom Line

Families can save a lot of tax by claiming the Child Tax Credit. In 2021, the credit was split into two parts. Half is paid in monthly installments, and the other half is available immediately when taxpayers file their returns. The upfront cash has helped many parents provide for their family's basic needs, reducing their children's poverty by almost 30% each month.



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