What Is the Child Tax Credit and How to Use It in 2022

For the tax year 2021, the child tax credit has increased to a maximum of $3,600. Who is eligible, when to expect Letter 6419, and how to reconcile the advance credit on your taxes are all explained in this primer. Keep on reading to find out more from Your Part Time Accountant.

The Child Tax Credit Is What?

A yearly tax credit called the child tax credit, or CTC is offered to taxpayers with dependent children who meet certain requirements.

It was first included as a component of the Taxpayer Relief Act of 1997 and has been crucial in helping American taxpayers with children obtain financial support.

As part of the American Rescue Plan, the tax credit, which was previously limited to $2,000 per qualifying dependant, was increased to a maximum of $3,600 in 2021. Additionally, many taxpayers received half of the credit as advance monthly payments from July through December 2021, which was a first in American history.

Letter 6419, which will list every advance payment made to you, should be sent to all recipients of the advance child tax credit payments by the end of January. The letter is to be used by taxpayers to reconcile the credit on their 2021 taxes. All according to the IRS. The IRS advises checking your IRS online account for the most recent information. Especially if you believe your Letter 6419 contains an incorrect advance payment total.

For Whom Is the Child Tax Credit Available?

If your modified adjusted gross income for the 2021 tax year is less than $75,000 for single filers, $112,500 for heads of household, and $150,000 for those filing jointly with a spouse, you can fully benefit from the enhanced credit.

Income above the aforementioned limits but below $400,000 (married filing jointly) or $200,000 for the first phaseout (all other filing statuses). You may reduce your total credit for each child by $50 for every $1,000. Your credit will not be reduced by this phaseout to less than $2,000 per child.

Income beyond $400,000 (married filing jointly) or $200,000 for the second phaseout (other filing statuses). Your credit per child will be reduced to $2,000 as a result of the phaseout. Which will continue to dock $50 for every $1,000. You can be completely barred from receiving the credit.

What Tax Consequences the Child Tax Credit Will Have

The CTC is entirely refundable for the 2021 tax year. This means it can lower your tax liability dollar for dollar and you can be eligible for a tax refund check for any balance.

The amount of credit you can claim on your 2021 return will depend on several factors. including whether you chose to receive advance payments, how much you were given as an advance, and your tax filing situation.

If You’ve Got Payments in Advance

You may find a thorough breakdown of the money you were paid from the advance CTC payments in Letter 6419.

It also verifies the number of eligible dependents used by the IRS to determine those advance payments. You can reconcile the credit when you file your return with the help of this information.

If You Chose Not to Receive Advance Payments

Claim the credit on your return more easily if you opted out of the advance payments. Before the first one was distributed in July. To claim the full amount of the credit depending on your salary in 2021 and the number of qualifying dependents you have, you must first certify that you are qualified for it.

If You Often Don’t Submit Taxes

The IRS’s non-filers sign-up facility allowed low-income families who might not typically file a tax return to sign up for advance payments. You must submit a return this year to claim the remaining amount. Or the full credit if you didn’t get the advance payments.

Will the Child Tax Credit Be Repaid to You?

Some good news first! It is not taxable income to receive the child tax credit. It’s a credit, therefore it may lessen your tax obligation. Or perhaps lead to a refund. If it turns out that you were overcharged for your advance payment, things can get a little complicated.

The upfront contributions represented a partial prepayment of the 2021 tax credit. One that you would typically claim during tax season. The IRS most likely used your most recent tax return (2020 or older) to determine how much of an advance to send you each month. Even though half of the credit was distributed early.

Therefore, there is a potential that you may have received more of an advance than you are entitled to. It can happen if your financial or personal circumstances (such as your filing status, income, custody arrangements, or residency status) have changed in 2021.

Here are a few potential outcomes:

Let’s assume that, based on your 2020 income, you received advance payments totaling $1,500 for your qualified dependant. However, your income has greatly grown in 2021, thus you can only receive a smaller credit. The extra sum that was given to you is seen as an overpayment.
In 2020, you were a single person filing a single tax return with one dependent. Based on that information, the IRS then sent you advance payments, which you accepted. You weren’t qualified for the child tax credit in 2021 since you spent more than half the year living abroad. It would also count as accepting the amount as an overpayment.

To Sum Up

If it turns out that you received a larger advance than you were qualified for, you will need to declare that to the IRS on your 2021 tax return as extra income tax. That extra income tax can either lessen your refund or possibly increase your overall tax liability.

Some overpaid individuals may also qualify for repayment protection, which exempts them from having to reimburse the IRS. On the IRS website, you may find out more about who is eligible. Before the tax-filing deadline, you can reconcile your credit.

If you’re unsure how to do so, or think you might have been overpaid, contact Your Part Time Accountant and get this sorted out.