President Joe Biden has proposed temporary changes to the child tax credit as part of a larger Covid-19 relief stimulus package. If the package passes in Congress, Biden’s Covid-19 plan will temporarily increase the maximum child tax credit from $2,000 to $3,000 for each child aged 17 and under, and up to $3,600 for children under age 6. Also, Biden’s plan would make the credit fully refundable for one year (right now, the credit is only partially refundable).
The Biden administration’s intent with this expansion is to help low-income families. According to Biden’s American Rescue Plan factsheet, “27 million children live in families with household incomes low enough that they didn’t qualify for the full value of the Child Tax Credit, and this measure would give these children and their families additional needed resources.”
The Washington Post reported that senior Democratic lawmakers are drafting legislation to allow the IRS to make direct payments to families who qualify for the child tax credit. Families would receive a monthly payment of $300 for each child under the age of 6, and $250 for each child age 6 to seventeen. This would be instead of the lump sum refund that taxpayers claiming this credit would typically get.
What is the Child Tax Credit (CTC)?
Similar to other credits, the child tax credit lowers the amount you owe in taxes. The tax credit is refundable if you don’t owe any taxes, which means you can claim the child tax credit as a refund. But unlike other credits, the Internal Revenue Service (IRS) limits the refundable amount partially up to $1,400 for each child (known as the Additional Child Tax Credit).
“By providing a refundable tax credit for families with children, the CTC provides both a lower tax liability for those households with higher incomes and an additional source of income during the tax season for lower-income households,” Watson said.
A refundable credit allows you to receive a direct payment from the IRS and can increase an existing tax refund.
What Children Qualify for the Child Tax Credit?
A qualifying child is someone who can be claimed as a dependent and meets the following criteria:
They have a valid Social Security numberYour child must have a Social Security number to qualify for the child tax credit. If your kid only has an ITIN, they won’t qualify. They’re under the age of 17 Your child must be under the age of 17 by December 31 of the tax year. So this means if your kid turns 17 on the last day of the year, he or she will not qualify for the child tax credit. They have U.S. citizenship, or are U.S. nationals or resident aliensA U.S. national is born in American Samoa, in the Commonwealth of the Northern Mariana Islands, or someone born outside of the U.S. to two U.S. national parents. A permanent resident alien is an immigrant or alien admitted to the U.S. Your child did not provide more than half of their own support Your child must not provide more than half of his or her support, which includes lodging, food, utilities, repairs, clothing, education, health care and other costs.They must live with the taxpayerYour child must live with you for half of the year. You can prove this through a copy of a lease or school records. However, there are some exceptions:
Your child attended school or served in the military away from the home
Your child was away due to vacation, medical care, or business
Your child was in a juvenile facility detention home
You are divorced or separated from your spouse, and your child was away from the home
They must be related to youThis relationship includes a son, daughter, stepchild, eligible foster child, adopted child, sibling, step or half-sibling, or a descendant of any of them. They didn’t file a joint return to obtain a refund Your child did not file a married filing joint tax return for the year. However, if they did file a joint return, it was to claim a refund of federal estimated taxes paid or withheld during the year.
If your child doesn’t meet the criteria, they may be eligible for the Other Dependent Child (ODC) credit, although this credit isn’t as generous as the CTC. The ODC is worth up to $500 for other dependents who do not qualify for the child tax credit. For example, if your son is over 17 and is not eligible for the child tax credit, he would be eligible for the ODC.
A person qualifies for the ODC if he or she is your dependent, is a U.S. citizen, U.S. national, or resident. In addition, the person must have a Social Security number, Individual Identification Taxpayer Number or Adoption Identification Number.
What are the Income Requirements for the Child Tax Credit?
Your income will determine whether you qualify for some, all, or none of the child tax care credit. For starters, if you earn less than $2,500 for the year, you are not eligible to claim the child tax credit.
For a single taxpayer, your modified adjusted gross income (MAGI) must not exceed $200,000 ($400,000 for married filing jointly taxpayers) to qualify for the full tax credit. Your modified adjusted gross income is a gauge the IRS uses to determine whether you are eligible for some credits and deductions. It is your income minus deductions, then some income and deductions are added back.
If your MAGI exceeds these thresholds, your child tax credit amount is reduced by 5% for each $1,000 above the threshold. For example, if you are a single taxpayer and your MAGI is $225,000, you’ll receive a total tax credit of $75o.
How to Claim the Child Tax Credit on Your Tax Return
You can claim the child tax credit on your federal income tax return (Form 1040, 1040-SR, or 1040-NR). You will need to include the name and social security number for each qualifying kid on your tax return. You can use the Child Tax Credit and Credit for Other Dependent Worksheet to determine your credit amount. But do not be alarmed if you do not know how to complete the form. Online tax software programs like TurboTax and H&R Block will help guide you.
You are required to file Form 8862 if the IRS denied or reduced the child tax credit after 2015 for any reason besides a mathematical or clerical error (collectively referred to as a math error). For more information on how to complete the worksheet, review IRS Publication 972.