The Child Tax Credit (CTC) is claimed to reduce your US tax liability. Credit is received per qualifying child and is phased out for high-income earners. The credit is refundable, and families can receive a refund where the credit amount exceeds taxes owed.
The CTC amount has been subject to change and has been increased by the American Rescue Plan for 2021. For 2021, up to $3,600 can be claimed per child under the age of 6, and $3,000 per child between the ages of 6 and 17. The extra amounts are for families that have lived in the US for at least 6-months of the year. For those that have not, the standard Child Tax Credit of $2,000 ($1,400 refundable) is still available.
What is the phase out process for the Child Tax Credit?
The amount of credit available starts to decrease once a certain income threshold is met. The credit decreases at a rate of 5% of the AGI (adjusted gross income) over the amount until reaching pre-2021 levels. The credit is fully refundable and low-income families can qualify for the maximum credit, regardless of income.
The phase out thresholds are:
- $112,500 of income for single parents.
- $150,000 for married couples.
The credit is then further reduced by 5% of AGI over:
- $200,000 for single parents.
- $400,000 for married couples.
Does my child qualify for the Child Tax Credit?
In order to be eligible for the Child Tax Credit, children must be 16 years old or younger at the end of the tax year. They also need to be a US citizen with a valid SSN (Social Security Number). You need to claim the child as a dependent on your return and the child must have lived with you for more than half of the tax year, and you’ve contributed at least 50% of the costs of raising them.
What if a child does not qualify for the CTC?
Under the TCJA (Tax Cuts and Jobs Act), ‘other dependents’ who do not qualify for the $3,600 or $3,000 credit can access a $500 non-refundable credit if they are:
- Aged 18;
- Aged 19-24 in full time education for at least five months of the year.
Some older dependents and children who are non-US citizens can also qualify for the $500 credit.
Help me get my child tax credit refund
What is happening to the CTC in 2022?
From 2022-2025, the CTC will revert back to prior 2021 law levels, as established by the 2017 TCJA.
The new credit available from 2022 will be up to $2,000 for each child under the age of 17 ($1,400 refundable). This credit will decrease by 5% of AGI over $200,000 for single parents or $400,000 for married couples.
This credit will only be partially refundable, and if the credit awarded exceeds taxes owed the tax refund will be capped at $1,400. This $1,400 is referred to as the Additional Child Tax Credit (ACTC), or ‘refundable CTC’. However, the ACTC is limited to 15% of earnings over $2,500 – this means that those with very low income will not be able to claim the credit or can only claim a reduced credit.
What is the impact of the CTC on poverty?
Rather than distributing the CTC as a lump sum during the 2022 tax season, the IRS will distribute the credit periodically in 2021. Half of the refundable credit will be distributed to families as period advance payments beginning as early as July. This method is expected to reduce child poverty from 13.7% to 11.3% (Wheaton, Minton, Giannarelli, and Dwyer 2021).
The Tax Policy Centre estimates that in 2021, 92% of families with children will receive an average CTC of $4,380 (the average credit is able to exceed the maximum credit given per child, as families can have more than one child). In comparison, under prior law 89% of families with children received an average CTC of $2,310.
What changes have been made to the CTC?
The CTC was established in 1997 as part of the Taxpayer Relief Act. The original credit offered in 1997 was $400 per child aged 16 or younger, and this credit was non-refundable for the majority of families. In 1998, it was increased to $500.
In 2001, the amount was increased again and made refundable, to coordinate with the earned income tax credit (EITC). Once earnings reached $10,020 for families with two children, there was no further increase. The earnings threshold for refundable CTC was $10,000 and was indexed for inflation. Families with earnings in excess of this amount could receive a subsidy. When this threshold was reduced due to inflation – for example to $8,500 in 2008 and $3,000 in 2009 – the link between the phase-in of the refundable CTC and the EITC was broken.
In 2012, the CTC was increased again from $500 to $1,000 per child, as a result of the American Taxpayer Relief Act. Additionally, the provisions of the anti-recession stimulus package (American Recovery and Reinvestment Act of 2009) were temporarily extended to reduce the earnings threshold for the refundable CTC from $10,000 to $3,000. The Bipartisan Budget Act that came in 2015 then made the $3,000 refundability threshold permanent.
The 2017 Tax Cuts and Jobs Act then doubled the CTC for children under 17, from $1,000 to $2,000 per child, in effect from 2018. The refundable portion of this credit was indexed to inflation and limited to $1,400 per child.
As of 2020, inflation has not increased enough to trigger the minimum increase. Under the legislation, ‘other dependents’ who did not qualify for the CTC can qualify for a credit of up to $500. However, this legislation is set to expire after 2025 and the credit available for children under the age of 17 will revert to prior-law levels of $1,000 per child, with other dependents no longer being eligible for a CTC.