The Child Tax Credit: Do I Qualify & How Does It Benefit Me?

a Hispanic mother and her young son

With the current economic situation, there have been many different programs added and changes made to existing benefits to help provide for families. One major change was to the Child Tax Credit. With the most recent $1.9 million American Rescue Plan presented by President Joe Biden, this credit has been temporarily increased for the 2021 tax year. 

This article will explain the Child Tax Credit, how it works, and how it has changed over time up until the point of these new major changes. Once the history of the credit is understood we can further explore the changes that have been made with the American Rescue plan and how they may benefit you and our economy.

The Origin of the Child Tax Credit

The credit itself is not something completely new. This is a credit that has been around since 1998. It was originally introduced by 1997 legislation and was first available to taxpayers to be used in 1998. It started as a $500-per child non-refundable credit to taxpayers but has steadily increased over the past 20 years. In the beginning, this was a nonrefundable credit generally available to the middle and upper class. The changes over the years have not only increased the amount of the credit but it has also made it available to lower-income families.

The biggest increase before The American Rescue Plan was back in 2001. When Congress enacted the Economic Growth & Tax Act of 2001 it doubled the child tax credit to $1000 per child and made it partially refundable. The change from nonrefundable to refundable means that that if the amount of the credit exceeds income tax liability it would be added to the taxpayer’s refund. In prior years, the credit would be lost if it exceeded the income tax liability. 

Recent Changes

This year, the refundable Child Tax Credit (CTC) earnings threshold was set at $10,000 so families could now receive a subsidy for earnings above that amount. In 2017 tax law increased the maximum value of the Child Tax Credit from $1000 to $2000 per child.

There have also been changes over the years regarding who qualifies for this credit. Over the years key parameters of the credit have been changed, expanding the availability to more low-income families. With the 2017 increase, they also increased the income threshold at which the credit begins to phase out. In addition, the 2017 act also requires taxpayers to provide an SSN associated with each child. 

Failure to provide the child’s current social security number could result in the taxpayer being denied the credit. This helped cut down on the fraud that unfortunately was taking place regarding this credit, but it also ended the CTC being available for more than 1 million children lacking a social security number in low-income families.

The most recent changes within the American Rescue Plan have drastically changed the amount of the credit. It has been made more available to low-income families. It has become fully refundable, meaning families can receive the full excess amount as a refund. At his point, these changes are just temporary for the tax year of 2021. The Act increased the amount tax filers can claim up to $3600 for children under the age of 6 and up to $3000 per child ages 6 to 17. 

The Act also expanded the availability of the tax credit to millions of families who did not qualify before. In the past households had to earn $2500 in income and could only receive $1400 if the tax credit exceeds taxes owed. With the changes from the Act, families will qualify for the maximum credit regardless of how much they earned. This expansion of the credit makes it available to millions of families who did not qualify before.

As seen on NBC, Kris Cox the deputy director of federal tax policy at the Center on Budget and Policy Priorities said that some 27 million children, including half of Black and Latino children because their families did not earn enough. She said the poorest children have been getting the least from this credit she added that “this bill is completely historic because it would shift that and make sure that low-income children receive the full credit. The expansion would lift millions of children above the poverty line.

Who Qualify for the Child Tax Credit?

Not all families with children will qualify for the higher child tax credit. The enhanced tax break begins to phase out at adjusted gross incomes of $75,000 on single returns, $112,500 on the head of household returns, and $150,000 on joint returns. The amount of credit is reduced by $50 for each $1000 of the adjusted gross income over the applicable threshold amount.

Another major difference will be the distribution of the credit. Typically, the child tax credit would be applied to income tax owed, or if it exceeds the amount owed portions of it would be disbursed through a tax refund. With the American Rescue Plan half of the amount that you qualify for will be distributed by the IRS as monthly payments between July and December. You will receive the second half when you file your 2021 tax return next spring.  This means up to $300 a month per eligible child under 6 and up to $250 per month for each eligible child between 6 & 17 years old. 

The IRS has said it will begin sending payments on July 15th. These payments will be based on a taxpayer’s 2020 return or the 2019 return if 2020 has not been filed yet.

With all these changes made and such extra benefit being provided it is important to know who qualifies for the Child Care Tax Credit. At this point anybody with a qualified child dependent below $75,000 income for individuals and married couples below $150,000 income. The big question is what qualifies a child as a qualifying child dependent. 

A qualifying child dependent is a child who meets the IRS requirements to be your dependent for tax purposes. They do not have to be your child, but the qualifying child must be related to you.

A qualifying child is a child whose relationship to you meets five qualifying tests for relationship type, age, residency, support, and joint return.

  • To pass the relationship test the child must be a son, daughter, stepchild, foster child, brother, sister, half-sister, half-brother, stepbrother, stepsister, or a descendant of any of them.  
  • To pass the age test the child must be younger than the taxpayer (or spouse if filing jointly) They must be younger than 19 at the end of the year if not in school and younger than 24 at the end of the year if they are a full-time student. They can be any age if permanently and completely disabled and if this is the situation, they do not have to be younger than the taxpayer.
  • To pass the residency test the child must live with the taxpayer more than half of the year. A child who is born or dies during the year qualifies if the home was the child’s home the entire time the child was alive. A child is considered to live with a taxpayer when at the hospital following birth, or temporary absences due to special circumstances such as illness, education, business, vacation, or military service.
  • To pass the support test the taxpayer must provide more than half of their support.

So, if the child meets these requirements in relation to the taxpayer, they will qualify to add them as a qualified child dependent on the tax return and get the benefits of the increased Child Tax Credit for the 2021 tax year.  

One of the major questions of taxpayers and other politicians is how these credits and additional increases in spending going to be paid for.  There is a major proposal in play to make a significant spending increase in the IRS collections process. They feel this investment will produce 10 times the revenue than the initial needed investment. Please check out my next article about how IRS enforcement will soon get a major boost.

Other Tax Credits That You Might Qualify For

In conclusion, with these major changes to the Child Tax Credit, there is a major benefit of filing correctly. If you do not qualify for the Child Tax Credit, then there many more credits that can be utilized on a tax return. The Earned Income Credit or the qualifying relative credit are good examples of these.  

The American Rescue Plan also added some more credits other than this one that did not exist in tax law in previous years. A good example of this would be the 2020 Recovery Rebate Credit. This will help people claim credit for missed stimulus check payments. 

They are also pushing to extend the new benefits of the Child Tax Credit into future years as well. With this said with all the different credits and deductions being added and changing every year it is so important to get the right tax professional to assist you in your filings. 

Always look for somebody reputable who holds a licensing that backs up their education. CPAs and IRS Enrolled Agents are the ones that have the level of education to maximize and use everything within tax law to save you money.

 

Ozzie Gomez is a Senior Tax Settlement Agent and the owner of Innovative Tax Relief which holds business licenses in Tax Resolution, Tax Audit Representation and Tax Preparation.  With almost 10 years of experience in the tax resolution industry, he has personally helped more than 4,000 individuals and businesses resolve their tax issues.

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