What Is the Child Tax Credit and How Does It Really Work?

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Understanding the financial burdens that having a family can bring, the U.S. government pays out a Child Tax Credit every year to help families with qualifying children. Each qualifying dependent child that you have increases the amount of the credit you can earn.

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As the biggest burden is borne by families with lower income, there are caps on how much you can earn and still qualify for the credit. Read on to learn if you qualify for this important credit and how to go about claiming it. 

Who Qualifies?

To qualify for the Child Tax Credit, you will need both eligible dependent children and an income below certain limits. 

On the child front, any qualifying dependent child under the age of 17 qualifies. A qualifying child must fall into one of the following categories:

  • Son
  • Daughter
  • Foster child
  • Brother
  • Sister
  • Stepbrother
  • Stepsister
  • Any descendant of any of these qualifying categories, such as your grandchild, niece or nephew
  • Any adopted child lawfully placed with you for legal adoption

Additionally, you must claim the child as a dependent, which means the child must:

  • be under age 19, or under age 24 if a qualifying full-time student, or permanently disabled, regardless of age;
  • have lived with you for more than six months of the year; and
  • have been responsible for no more than 50% of their own support.
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From an income perspective, the Child Tax Credit phases out in two steps, as follows:

  • First, at a rate of 5% of adjusted gross income over the amount of $112,500 for single parents or $150,000 for married couples
  • Second, by an additional 5% of AGI over $200,000 for single parents or $400,000 for married couples

This still leaves the Child Tax Credit within reach of most Americans.

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How Much Is the Credit?

For tax year 2021, here are the amounts of the Child Tax Credit:

  • $3,600 for children ages 5 and under at the end of 2021
  • $3,000 for children ages 6 through 17 at the end of 2021

The Child Tax Credit can be a sizable benefit for families. If you have three children aged 6 to 17 and three children under the age of 6, for example, you could qualify for $19,800 in federal tax credits. Bear in mind, however, that the full amount of the Child Tax Credit only applies to families that come in under the eligible income limit as described above.

Note also that the Child Tax Credit is scheduled to drop back to its 2020 level of $2,000 per child for tax year 2022 and beyond.

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How Do You Claim the Credit?

To ensure that you get the full amount of the Child Tax Credit to which you’re entitled, you might consider working with a tax advisor. If you plan to file your own tax return, you’ll claim the Child Tax Credit using Schedule 8812 of Form 1040. The IRS publishes separate Instructions for Schedule 8812 to help you complete the form accurately.

How Is a Credit Different From a Deduction?

A credit is a much more powerful tax benefit than a simple deduction. A tax deduction simply reduces the amount of your taxable income, which can lower the amount of tax you pay. A tax credit is a dollar-for-dollar reduction in your actual tax liability.

This example can highlight the big difference between a credit and a deduction. Imagine you earn $50,000 in taxable income and you take a $5,000 deduction. This will reduce your taxable income to $45,000, resulting in somewhere between $500 and $1,850 in tax savings, based on current tax brackets ranging from 10% to 37%. However, a $5,000 tax credit will reduce your taxes by the full $5,000, making it as much as 10 times more valuable than a simple deduction.

Were Child Tax Credit Payments Advanced in 2021?

In an effort to help American families struggling with the effects of the coronavirus pandemic, the IRS authorized advance payments of the Child Tax Credit in 2021. Typically, taxpayers would have had to wait to file their tax year 2021 returns in 2022 before receiving the credit.

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However, under the American Rescue Plan, taxpayers received up to half of the amount of the Child Tax Credit to which they were entitled. The balance of that credit was still eligible for taxpayers to claim when they filed their 2021 tax returns.

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About the Author

After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.
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