Do you have children or any other dependents in your household? Then the chances are you’ll be able to claim the Child Tax Credit.
You may have already claimed this credit in the past, but for this year there are some major changes as a result of the tax overhaul initiated at the end of 2017 by the Trump administration. Taxpayers must be aware of these rules, so they don’t incorrectly claim the credit or miss out on what they deserve.
How much is the Child Tax Credit? For the 2021 tax year, this credit is worth up to $2,000. If you qualify, it will reduce your overall income tax bill due to the Federal government.
What is the Child Tax Credit?
The idea behind the Child Tax Credit (CTC) is to help parents and guardians by giving them an extra boost to their income. This tax credit is for any child who’s under the age of 17 and is worth $2,000.
This is a credit aimed at working parents, so you must have a minimum of $2,500 in earned income in order to qualify. For single filers, the credit begins to phase out at $200,000. For joint filers they will see the credit phase out at $400,000.
Remember, these tax credits reduce the amount you owe on your Federal tax credits.
If you owe $5,000 to the Federal government at the end of the tax year and you qualify for $4,000 in tax credits because you have two children, you would only need to pay $1,000 this tax year.
To make things even better for parents, these tax credits are refundable up to a maximum of $1,400. So, if you owe nothing, you could get up to $1,400 paid directly to you. The amount you can get can be determined with the child tax calculator.
What’s Changing for Taxpayers for the 2021 Tax Year?
President Donald Trump confirmed his flagship tax overhaul in 2017 known as the Tax Cuts and Jobs Act (TCJA), which has now come into force for the upcoming tax year. This brought a number of changes to the US tax code. Some of these changes also impacted the CTC.
Here are some of the big changes you need to take into account.
- The credit for each child was doubled to $2,000.
- Part of the CTC ($1,400) is now refundable. The credit wasn’t refundable before.
- All children must possess a Social Security Number.
- Parents must have an earned income of at least $2,500.
- The phase-out threshold was increased from $75,000 to $200,000 for single filers and from $110,000 to $400,000 for those filing jointly.
- Non-child dependents are now worth $500 in tax credits. These are not refundable.
The other big alteration was the TCJA removed the Additional Child Care Tax Credit and combined it with the current version of the CTC. That was the reasoning behind increasing the CTC limits and making it partially refundable.
Which Dependents Can You Claim the CTC on?
There are a range of tests to determine whether a dependent can be claimed as part of the CTC. The IRS uses six tests to decide if someone counts as a dependent.
Test One – The child must be under the age of 17 by the conclusion of the current tax year.
Test Two – The child must be a direct descendent, stepchild, half sibling, sibling, or an adopted child. The child can also be the direct descendent of any of the above, which includes grandchildren and nephews.
Test Three – The child can’t provide half of their own financial support, which is the money used for their living expenses. They also can’t file a joint return if you’re claiming them as a dependent.
Test Four – Taxpayers must claim the child as a dependent on their tax returns.
Test Five – Are they a citizen or resident alien of the US? They must also possess a Social Security Number when claimed as a dependent.
Test Six – The child must live with the taxpayer claiming them as a dependent for half of the tax year in question.
If the dependent passes all of these tests, you can claim them as a dependent and they’re eligible for the CTC.
Credit for Child and Dependent Care
The Child and Dependent Care Credit is a credit given to taxpayers who have to spend their money on taking care of their children. It can involve a variety of things, but the main reason why you may want to claim this credit is to cover the cost of child care.
As we have mentioned above, the child tax credit was started by the U.S. President in March 2021.
Under this tax benefit, the highest child tax benefit is $3,600 only for children below 6 years of age.
Also, the adjusted gross income should be less than $1,50,000 or $75,000 for both individuals.
Further, the added tax benefit will be discontinued for those who pay taxes but earn more money.
On the other hand, the benefit will cease for those who earn $95,000 and the married couple who earn $1,70,000 and file taxes jointly.
The official sources will take 2020 tax returns into use to ensure eligibility.
To be eligible for a deduction for child care expenses, the child must be charged to you.If you have the child looked after away from your home (nursery or daycare center or approved nursery assistant):a tax credit equal to 50% of the expenses paid for the care (excluding food costs and deduction of family help received under of custody) is applied to the expenses child tax credit income limit you incur for the care of your children aged under 6 at 1 st January of the income year (children born after 31 December 2013 for the imposition of income for the year 2020 declared in 2021).The expenses taken into account include salaries and social contributions paid to the childminder.If you live in a common-law union, only the parent who has the dependent child can benefit from the tax credit provided that the supporting documents for the sums paid are established in his name.
However, in the event that the burden of supporting the child is shared and neither of the two parents can justify having the main charge, the amount of the tax credit is divided by two.Expenses are limited to $2,300 per child in care ($1,150 if the child is in alternate residence or shared care).You must indicate these expenses under the heading “Childcare costs for children under six years old” If you declare online, the amounts paid in 2020 for these expenses and which you declare via the PAJEMPLOI system will be reminded to you in order to help you to declare the corresponding amounts.If you have the child looked after at your home:You can claim the tax credit for amounts paid for home employment.
For more details, you can refer to the information you will find in the section "Personal services".As part of the withholding tax, the tax credit (childcare costs for young children or employment of an employee at home) is part of the mechanism known as the "reduction advance and tax credit".
Thus, the tax credit that will be granted to you in the summer of 2021 for expenses paid in 2020 will give rise to the payment of a deposit of 60% of the amount of this tax credit in January 2022.
During the liquidation of income tax for 2021 in 2022, the advance paid will be reduced by the tax credit that you may have on the basis of expenses incurred in 2021 (in 2021 you will therefore have received 100% of the credit of tax to which you are entitled: 60% in January, and the remainder in the summer).Schooling of childrenWhen your dependent or attached child pursues secondary child tax credit income limit or higher studies in a public or private establishment on December 31 of the tax year (December 31, 2020 for the 2020 income tax), you can benefit from an income tax reduction.Note: education must lead to the issuance of a diploma (general, technological, vocational or university training, excluding continuing education qualification courses).
In addition, teaching must be provided collectively and full-time in an establishment (with, where appropriate, work-based training).
These next couple of blog posts will continue to examine the changes that will take place during this new tax year.
We hope to provide you with insight whether you’re an individual filer or a business filing taxes.See more
