If you’re like me, you like to get every tax credit you can. I mean, who wants to pay more taxes than they absolutely have to?
The only problem with tax credits is it’s extremely hard to keep track of them all.
Tax credits are even more difficult to understand since the tax reform law passed by the Trump administration in December 2017 that doubled child tax credits. Not just that, but during the pandemic there has been talk about expanding child tax credits through the HEROES Act.
If you find yourself confused about what, if any, changes have occured with the child tax credit, you’ve come to the right place.
Read on for an overview of the 2020 and 2021 Child Tax Credit, including advice on how to get the maximum benefit from this tax break for your family.
What Is the Child Tax Credit?
The child tax credit is a beneficial credit offered to parents and guardians to help decrease their tax bill.
Rather than functioning like a deduction, the child tax credit operates as a tool that works toward reducing the amount you pay in taxes. Whatever amount of the tax credit you receive is subtracted from the total of your tax bill, cutting down the amount you pay fairly significantly.
Parents or guardians with qualifying incomes can claim the full child tax credit amount for each of their dependent children.
This tax credit is one of the simplest and most rewarding tax breaks you’ll find, and it has doubled over the last two years, benefiting families even more than before.
How Much Can You Claim?
Your access to the child tax credit depends, in part, on your income, specifically your adjusted gross income.
Like the child tax credit amount, the phaseout limits for it have increased with the tax bill as well.
This year’s child tax credit amounts to $2,000 per child.
Married couples filing jointly who make under $400,000 per year and single individuals, head of household, or married couples filing separately who earn less than $200,000 per year, will be able to take $2,000 per child as their Child Tax Credit.
How Do You Claim the Credit on Your Taxes?
All the calculations and claiming of the Child Tax Credit are done on your normal itemized form 1040.
You can do all the calculations on Schedule 8812 to make sure you get the maximum amount you qualify for.
One of the best ways to ensure you get the child tax credit and other tax refunds you qualify for is by filing with a tax software program.
If you are using tax software, all of the top tax software packages will automatically apply the CTC for you as you fill out your family information.
What Are the Income Limits for the Child Tax Credit?
While the income cutoff for the child tax credit used to start phasing out at $110,000 for married couples, it is now at $400,000 for the modified adjusted gross income. This limit phases out completely at $440,000. For singles filers, it begins to phase out with a modified adjusted gross income of $200,000, phasing out completely at $240,000.
Taxpayers who are married filing jointly with an adjusted gross income of $400,000 or less can receive the full credit.
Phase-outs for this credit will start at these income levels.
But beyond the basic income limits, there are a few more stipulations to qualifying for the child tax credit.
Who Can Claim the Child Tax Credit?
In addition to knowing your income, you should double check the requirements dictated by the IRS, listed below in order to be certain you qualify for all or some of the Child Tax Credit.
- Citizenship: Qualifying children must be citizens or residents of the United States who can be claimed as dependents by the taxpayer.
- Age: Children must not have reached the age of 17 by the end of the tax year.
- Relation: Children may be your blood children, grandchildren, stepchildren, and/or adopted children. Foster children also fall under this category as long as they have lived in your home for the entire year in question.
- Dependency: You must claim the child as a dependent. You need to claim the child as a dependent on your federal taxes in order to be eligible for the credit.
- Residence: The child must live with you. In fact, the child must have resided in your home for at least half of the tax year, although some exceptions apply.
Can You Get the Child Tax Credit as Part of Your Refund?
The short answer: yes.
Generally speaking, the child tax credit functions as a credit against what the taxpayer owes in taxes.
Sometimes, however, it can translate into an actual tax refund or tax rebate.
Most tax credits fall into one of two categories: refundable and non-refundable.
As the name suggests, a refundable credit can boost your tax refund, whereas a non-refundable tax credit cannot. The Additional Child Tax Credit falls somewhere in between.
Form 1040 ultimately determines your eligibility for the child tax credit, and when you file with tax software you can get an idea of the type of return you can expect to receive.
How Can You Get the Additional Child Tax Credit?
In previous years, the child tax credit was 100% refundable, meaning if your tax bill totaled $0 and you qualified for the credit, you could get the full child tax credit amount in the form of a refund from the IRS.
The 2017 Tax Cuts and Job Act amended that rule, though, capping the amount of the additional child tax credit.
With the Additional Child Tax Credit, you could get a refund of up to $1,400 if the child tax credit amount is higher than the taxes you owe.
If your income meets a minimum of $2,500, you are eligible to receive $1,400 of this credit as a refund, per child.
For a small percentage of families in the United States, the Child Tax Credit will be larger than their tax liability.
In this case, a portion of the unused part of the Child Tax Credit can be refundable as an additional Child Tax Credit.
What this means is, you can receive a refund from the IRS of up to $1,400 of the child tax credit back even if you don’t wind up owing any taxes.
That number has stayed the same between 2018 and 2021, just as the $2,000 tax credit amount has.
Child Tax Credit History
The Child Tax Credit is now more than 20 years old and has helped millions of families to afford the cost of raising a child. The credit has been a part of tax reform during three different presidencies.
Clinton – Child Tax Credit Inception
In working with Congress, the Clinton administration signed into law the Taxpayer Relief Act of 1997. While there were many reforms in the bill, the newest innovation was a $400 child tax credit for the 1998 tax year and increased to $500 after 1998.
The idea came from a report published in 1991 from the National Commission on Children as a means to combat child poverty. That report suggested a $1,000 credit, but that was trimmed to the eventual $500 that came seven years later.
Bush – Child Tax Credit Expansion
The Economic Growth and Tax Relief Reconciliation Act of 2001, also known as the “Bush” tax cuts, increased the Child Tax Credit to $1,000 and made it partially refundable up to $1,100.
These were passed as a temporary change, but made permanent during the Obama administration.
Trump – Child Tax Credit Expansion
President Trump signed the Tax Cuts and Jobs Act on December 22, of 2017. This doubled the tax credit up to $2,000, changed the income limits from $110,000 to $400,000 for married couples, and from $75,000 to $200,000 for individuals.
The legislation also increased the refundable amount to $1,400. These provision changes were designed to hedge inflation, as well as, help both upper and lower income families.
Biden – Child Tax Credit Proposal
President Biden proposed increasing the child tax credit to $3,600 for children under six, and up to $3,000 for children up to age 18.
Equally important, the President’s proposal would make the credit fully refundable. That means the credit will be paid to taxpayers, even if it exceeds the taxpayer’s tax liability. Taxpayers who have no tax liability would receive 100% of the credit as a refund.
This is of course a proposal and while some version of the President’s plan may become law, significant changes are likely before it does.
My Top Picks for Tax Software
While there is a longer list of the best tax software services, there are three that stand out among the rest. The best software includes:
- TurboTax: TurboTax will ensure you get every dollar of credits available to you. You can read more in the full TurboTax review here.
- H&R Block: H&R Block also offers comprehensive tax filing assistance. You can learn more in my H&R Block review.
- Tax Act: Tax Act is user-friendly, affordable, and can help you file easily. Get all the details in my TaxAct.com review.
Signing up for any one of these services will make sure you get your maximum credit.
If you have kids and earn less than $400,000 as a married couple or $200,000 as an individual, changes to the Child Tax Credit will save you money on taxes in 2020.
However, your savings may be wiped away in other areas of the tax code, specifically because personal exemptions and several other deductions have been replaced with a higher standard deduction for everyone over the last few years.
Either way, make sure to speak with a tax professional if you’re unsure how the new tax law will affect you.
A bigger child tax credit is always a good thing, but it’s possible you could save even more on taxes with some professional guidance and help.