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Understanding the Expanded Child Tax Credit for 2021 Taxes

EXPECTED READ TIME:5 minutes

Tax season brings its fair share of uncertainty for us non-CPAs, and that’s even more true this year.

As part of its COVID-19 relief package, Congress has changed the requirements and amounts of certain tax credits, hoping to ease the financial burden weighing on many families. One of the biggest changes has been the expansion of two tax credits, the child tax credit and the child and dependent care credit.

Here’s what you need to know to claim the maximum amount of these credits. Remember to consult a licensed tax professional for the most up-to-date information on tax laws in your area.

What Is the Expanded Child Tax Credit?

The child and dependent tax credit was introduced in 1997 as part of the Taxpayer Relief Act. Originally, it offered taxpayers a tax credit of up to $2,000 for each qualifying dependent.

However, the 2021 American Rescue Plan expanded this credit in three ways:

  • Increased tax credit to $3,600 per dependent age 5 or younger
  • Increased tax credit to $3,000 per dependent age 6 to 17
  • Allowed taxpayers to claim up to half of this credit in advance

Those who accepted advance credits received them through a series of $250 or $300 checks dispersed from July 2021 through December 2021. Taxpayers who received these advances will still receive up to half of their total tax credit when they file their 2021 tax return.

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Do I Qualify for the Child Tax Credit?

Eligibility for the child tax credit is based on your income and the eligibility of your dependents. Families with lower incomes can claim the full tax credit, while higher-earning families may only be able to claim part of the credit.

Income

The amount of the child tax credit you can claim is based on your modified adjusted gross income, meaning your pre-tax income after your allowable tax deductions. The table below shows how much of the tax credit a filer can claim based on their family income.

Amount of Tax Credit Received Modified Gross Adjusted Income Cutoff
Full child tax credit Under $75,000 for single filers; under $112,500 for heads of household; under $150,000 for married filing jointly
Credit may be reduced by $50 for each $1,000; will receive at least $2,000 per child Above $150,000 but below $400,000 if married filing jointly; above $150,000 but below $200,000 for all other filers
Credit may be reduced by $50 for each $1,000; may reduce your credit below $2,000 per child; may be disqualified from tax credit entirely Above $400,000 if married filing jointly; above $200,000 for all other filers

Dependent Requirements

In addition to qualifying by income, you must also make sure you can claim your dependents. Some of the requirements to claim a dependent include that the individual:

  • Is a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico
  • Is under a certain age (typically under 18 or under 23 for enrolled students)
  • Received at least half of their financial support from you during the last year
  • Lived with you for more than half the tax year (except in certain cases such as college students or youths held in detention centers)
  • Can’t provide more than half of their own financial support
  • Can’t file a joint tax return with someone else

Some exceptions apply such as in the case of permanently or totally disabled adult children. You can learn more about qualifying dependents using the IRS’s interactive Child Tax Credit Portal.

Families with lower incomes can claim the full tax credit, while higher-earning families may only be able to claim part of the credit.

 

How Will the Child Tax Credit Affect My Taxes?

If you claimed your child tax credit in advance, then you should expect a smaller tax refund than usual. This is because you have already received part of your refund early. And depending on your other deductions, you may end up owing the IRS.

How Do I Claim the Rest of My Child Tax Credit?

If you collected part of your child tax credit in advance (through monthly payments during the second half of 2021), then you will soon receive Letter 6419 from the IRS. This letter outlines how much of your tax credit you have already received and how much you can still claim when you file your taxes.

If you did not receive your tax credit in advance, you can claim your whole tax credit at the time you file your 2021 tax return.

Childcare expenses covered with your FSA cannot count toward your tax credit.

Will the Expanded Child Tax Credit Continue in 2022?

The Biden administration proposed an extension of the expanded child tax credit as part of their Build Back Better plan. However, currently the bill is stalled in Congress. Unless the bill is approved, the child tax credit will return to its pre-pandemic amounts and will be claimed at the end of the year when people file their taxes (instead of through advanced installments).

Are the Child Tax Credit and the Child and Dependent Care Credit the Same Thing?

Although they sound similar, the child and dependent care credit and the child tax credit are two separate things. The care credit is a tax credit for working adults who must pay someone to care for their dependents while they are at work or looking for work. These dependents are often children, but could also include disabled spouses, siblings, or parents for whom the tax filer is responsible.

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This credit offers different amounts of relief to taxpayers depending on whether they are working or looking for work. Usually, taxpayers can claim a maximum of $3,000 for one qualifying dependent or $6,000 for more than one qualifying dependent if they have to pay for caregiving in order to go to work. Tax filers who must pay for childcare while they look for work can claim 20-35% of their care expenses.

As with the Child Tax Credit, the American Rescue Plan has increased the amount parents and caregivers can receive if filing for a Child and Dependent Care Credit. The new cap is up to $8,000 for one dependent and up to $16,000 for two or more dependents.

Although they sound similar, the child and dependent care credit and the child tax credit are two separate things.

Can I Claim Both Tax Credits?

Taxpayers who qualify for the child tax credit and also qualify for the child and dependent care credit can claim both tax credits during the same year. These are two separate tax credits that provide different kinds of support for parents and caregivers.

What if I Have a Dependent Care Flexible Spending Account?

Childcare expenses covered with your FSA cannot count toward your tax credit. Since money put into FSAs is deposited pre-tax, you’ve already received a tax credit on that money, which is why it can’t count toward your child and dependent care credit.

However, if your care costs exceed what was in your FSA, you can deduct the difference through the child and dependent care credit.

The Takeaway

Now that you know how to maximize deductions for your children and dependents, it’s time to get started on filing. Start early so you can begin thinking about how to use that tax refund. Will you use it to boost your savings? Pay down debt? Start an emergency fund?

Ready for a Bigger Tax Refund?

Discover five ways to get more back when you file this year.

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