ERC Credit Advisory

Child Tax Credit: Know More About it

Child Tax Credit is a tax benefit that provides financial assistance to families with children. It is a federal tax credit that was first introduced in 1997 as part of the Taxpayer Relief Act. The credit is designed to help families offset the costs of raising children and to provide additional support for families with lower incomes.

The Child Tax Credit provides eligible families with a credit of up to $2,000 per child under the age of 17. The credit is available to families who meet certain income requirements and have a qualifying child. The credit is also refundable, which means that families can receive a refund for any credit amount that exceeds their tax liability.

In addition, the American Rescue Plan Act (ARPA) of 2021 expanded the Child Tax Credit for the 2021 tax year. Under the new rules, eligible families can receive up to $3,000 per child between the ages of 6 and 17, and up to $3,600 per child under the age of 6. The credit is also fully refundable and can be paid out in advance through periodic payments beginning in July 2021.

To be eligible for the expanded credit, families must meet certain income requirements and have a qualifying child. The income limits for the expanded credit are higher than those for the regular Child Tax Credit, and the credit begins to phase out for individuals earning over $75,000 per year and for married couples earning over $150,000 per year.

Overall, the Child Tax Credit is designed to help families with the cost of raising children, and the expanded credit provided by the ARPA offers additional financial assistance to eligible families.

How Does Child Tax Credit Work?

The Child Tax Credit works by providing eligible families with a credit against their federal income tax liability. The credit amount is based on the number of qualifying children in the family and the family’s income level.

For tax year 2021, the credit amount is up to $3,000 per child between the ages of 6 and 17, and up to $3,600 per child under the age of 6. The credit is fully refundable, which means that families can receive a refund for any credit amount that exceeds their tax liability.

To be eligible for the Child Tax Credit, families must meet certain requirements. They must have a qualifying child who is under the age of 18 and who meets certain criteria, such as being a U.S. citizen or resident alien and living with the family for at least half of the year. The family must also meet certain income requirements, which vary depending on the number of children in the family.

For tax year 2021, the credit begins to phase out for individuals earning over $75,000 per year and for married couples earning over $150,000 per year. The credit phases out at a rate of $50 for every $1,000 of income above the threshold.

Families can claim the Child Tax Credit on their federal income tax return, using Form 1040 or 1040-SR. They can also choose to receive advance payments of the credit, which began in July 2021 and will continue monthly until December 2021. Families who choose to receive advance payments will receive half of their estimated credit amount in monthly payments, and will claim the other half when they file their tax return for the year.

Which Dependents Are Eligible for the Child Tax Credit?

To be eligible for the Child Tax Credit, the dependent must be a qualifying child. Generally, a qualifying child must meet the following criteria:

● Age: The child must be under the age of 18 at the end of the tax year for which the credit is being claimed.
● Relationship: The child must be the taxpayer’s son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of these individuals, such as a grandchild.
● Support: The child must not have provided more than half of their own support for the tax year.
● Residency: The child must have lived with the taxpayer for more than half of the tax year. There are exceptions to this rule for temporary absences, such as for school, vacation, medical care, or military service.
● Citizenship: The child must be a U.S. citizen, U.S. national, or U.S. resident alien.
● Taxpayer identification number: The child must have a valid Social Security number or an individual taxpayer identification number (ITIN).

It’s important to note that the Child Tax Credit only applies to dependent children who meet the above criteria. Other dependents, such as elderly parents or adult children, are not eligible for the Child Tax Credit, but they may be eligible for other tax benefits, such as the Credit for Other Dependents or the Dependent Care Credit.

How to Claim Child Tax Credit?

To claim the Child Tax Credit, you must first determine if you meet the eligibility requirements. If you have a qualifying child who is under the age of 18 and meets the criteria listed above, and you meet the income requirements, you can claim the credit on your federal income tax return using Form 1040 or 1040-SR.

To claim the credit, you’ll need to provide your child’s name, Social Security number, and date of birth. You’ll also need to indicate the number of qualifying children you have and calculate the amount of your credit based on your income level and the number of qualifying children.

If you have a tax liability, the credit will reduce your tax liability dollar-for-dollar. If your credit exceeds your tax liability, you may be eligible for a refund for the excess amount. The Child Tax Credit is also fully refundable for tax year 2021, which means that you can receive a refund for the entire amount of the credit even if it exceeds your tax liability.

Alternatively, you can choose to receive advance payments of the Child Tax Credit beginning in July 2021 and continuing monthly until December 2021. If you choose to receive advance payments, you’ll need to provide the IRS with your updated information, such as your income and number of qualifying children, to ensure that your payments are accurate. You can also opt out of advance payments and claim the credit on your tax return instead.

Conclusion

The Child Tax Credit is a tax credit that can provide a financial benefit to families with qualifying children. The credit amount has recently been increased as part of the American Rescue Plan Act, with eligible families able to receive up to $3,600 per qualifying child for the 2021 tax year. To qualify for the credit, the child must meet certain age and relationship criteria, and the family must meet income limits. The credit is partially refundable, which means that even families with little or no tax liability may still be able to receive a refund. The Child Tax Credit can provide a valuable source of financial assistance to families with qualifying children, and it’s important to explore your eligibility and take advantage of this credit if you qualify.

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