Child Tax Credit
Some people are noticing a little more money in their bank account than normal this July. For most people, including myself, finding extra money in the bank is never a cause for concern – but perhaps it has piqued your curiosity! If you typically receive the child tax credit once a year when your return is filed, that may just be why you suddenly have more cash. With some recent changes to the law governing the child tax credit, taxpayers may find themselves thinking more about taxes than just the one time a year.
A History of the Child Tax Credit
The child tax credit was enacted as part of the Taxpayer Relief Act of 1997 and originally provided a $400 per-child credit. Interestingly, the implementation of this credit accounted for over 60% of the 10-year cost of the bill according to the 1997 Joint Committee on Taxation. The credit has gradually expanded over-time. It was increased to $1,000 per child as part of the Bush tax cuts. It was further increased to $2,000 per child with a $1,400 refundable component which had been the status of the law until the credit was further increased by the American Rescue Plan of 2021 to $3,600 for children under 6, and $3,000 up to age 17.
The child tax credit has regularly had bipartisan support in the legislative branch because of its direct impact on the reduction of child poverty. This makes it perhaps the only item of common ground to be found in the halls of the Capitol Building.
Amount. The credit has increased from $2,000 to $3,000, or $3,600 if your child is under the age of 6.
Refundability. The credit was previously refundable only up to $1,400. Under the new law, the credit is fully refundable. This means that if you otherwise would have had zero tax due at the end of the year, then you will receive a refund of $3,000 or $3,600.
Limitations. Interestingly, you used to need to have earned income before you would be eligible for the credit. With the 2021 law, there is no lower income limit on credit eligibility. However, people of high incomes may see the expanded credit reduced. The value of the credit begins to phase-out for single filers at $75,000; head-of-household filers at $112,500; and married filing joint couples at $150,000. Do not worry though, the credit will still be as high as it was in previous years up until you hit incomes of $200,000 for non-married filing joint taxpayers and $400,000 for married filing joint couples.
When Received. Previously, the child tax credit was received after the IRS processed your individual tax return. Now, the credit will be paid out in monthly increments (starting on July 15th) and will be based on the monthly proration of your credit figure. For instance, if your child is over 6 and you are otherwise eligible, you should receive $250 per month. If your child is under 6 and you are otherwise eligible, you should receive $300 per month.
Applicability. Currently, the expanded tax credit is set to expire after 2021 which means barring any extension of the program, we will be back to same-old, same-old in 2022.
Reporting. We know how tempting it can be to throw away mail that says “IRS” on it. If you have received advanced child tax credit payments in 2021, make sure to keep Letter 6419 from the IRS which will show the amount of advanced credit payments that were disbursed to you during 2021. Any person that keeps their IRS letter and gives it to their tax preparer next tax-season will get a free donut (so long as you know someone who will buy you a donut).
Tools. The IRS is starting to get the picture that they need to provide taxpayers with some more guidance when Congress makes big changes to tax law. On this topic, the IRS has released 3 tools that taxpayers can use to answer their child tax credit questions. Use the URL below to access the IRS webpage with entry links for each of the three tools.
- Tool 1 – Manage Payments
- Check if you are enrolled to receive payments
- Unenroll to stop getting advance payments
- Provide or update your bank account information for monthly payments starting with the August payment
- Tool 2 – Non-Filers Information
- If you are not required to file a tax return and have not given the IRS your information already, you will need to give the IRS some basic information for the Child Tax Credit.
- Tool 3 – Eligibility Check
- Check if you may qualify for advance payments.
Although the expansion of the child tax credit is not permanent law, the general trend has been to increase this credit to help offset the cost to parents of providing for their children. The issue is uniquely partisan and so we would not be surprised if the provision gets extended further. As we saw with the economic stimulus checks, Congress is attempting to provide social benefits through the tax code while also accelerating how quickly that money gets in the hands of taxpayers. Please ensure that you hold onto any IRS correspondence on this matter and reach out to our offices if you have any questions!
Bellingham – (360) 671-7891
Burlington – (360) 757-3175
Friday Harbor – (360) 378-4610
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax advisor.