Did you receive multiple stimulus checks in the mailbox for the child tax credit in 2021 (and do a little happy dance every time)?
If you have a child, it’s likely that you benefited from the largest child tax credit in history through the American Rescue Plan through the White House. Most families automatically received monthly payments per child per month since July 2021.
Many families have used it to help offset the cost of raising kids, including using it for housing, food, childcare, healthcare and other necessities. The tax credits kept millions of children out of poverty and injected billions of dollars into the U.S. economy, according to the New York Times. Researchers from Columbia University said that it kept 3.8 million children out of poverty.
We’ll touch on the details of the stimulus check child tax credit and then help you determine how it might impact your tax return this tax season.
What Were the Rules of the Child Tax Credit?
First of all, the child tax credit increased from $2,000 to $3,000 per child for those under 17. Qualifying children are also those 17 and under (and $3,600 for kids under age six) for the 2021 tax year. The expansion to the Child Tax Credit removed the requirement that households must earn at least $2,500 to receive the credit. Families can receive the full credit even if their tax liability is zero and they could receive up to half the credit through monthly payments on the 15th of the months from July to December 2021.
Here’s a quick chart of the payment dates from last year:
|July 15, 2021
|August 13, 2021
|September 15, 2021
|October 15, 2021
|November 15, 2021
|December 15, 2021
The credit began to phase out if:
- Your modified adjusted gross income (AGI) was above $400,000 on a joint return or over $200,000 on a single or head-of-household return.
- Once you reached the $400,000 or $200,000 modified AGI threshold, the credit amount is reduced by $50 for each $1,000 of AGI over the applicable threshold amount.
- Families who have an AGI of $200,000 (or $400,000 if filing jointly) can qualify for the standard child tax credit of $2,000 per child.
President Biden wanted to extend the stimulus check child tax credit to 2025 and turn it into a permanent fully refundable child tax credit through the American Families Plan. Democrat Rep. Richard Neal of Massachusetts has also introduced legislation called the Building an Economy for Families Act. Congress couldn’t pass the stimulus payments further, which we’ll cover more in depth later.
How Might the Stimulus Child Tax Credit Impact Your Tax Return?
Despite your excitement at receiving the stimulus child tax credit, it could do several things to your tax return — including making it bigger or, unfortunately, smaller. It could also affect other aspects of your tax return. Let’s investigate what could happen in several situations.
Possibility 1: Your return may be smaller.
You might not get as large of a return that you normally might have gotten. That’s because the child stimulus tax credit checks gave you all or a portion of your return upfront — you got what you normally would have, just earlier. The Internal Revenue Service (IRS) will subtract the amount you received from your total tax return and give you the remainder of the amount you’re owed.
Possibility 2: You may have to repay money.
If you’re expecting direct deposit into your bank account, straight from the IRS, you might be surprised to learn that your tax records say you’ll get a different amount. Yes, you may even have to pay the IRS if your life circumstances changed since you last filed — the government might have overpaid you based on the rules of the stimulus tax credit. For example, if your income went up after you filed your 2020 taxes or if your child turned 18 during that time frame, you might owe money to the IRS.
You may also owe money you weren’t supposed to get, you may have received payments for the child tax credit that you weren’t supposed to get. For example, if you’re divorced and your ex has primary custody of the kids, there’s a chance you weren’t supposed to receive any Child Tax Credit funds. If you did, the IRS will know about it and will expect to be reimbursed.
Possibility 3: You might have to add a dependent.
Parents can claim children born in 2021 and for families who added a new dependent last year. Those who do may be able to receive a 2021 Recovery Rebate Credit of up to $1,400 for each new dependent, including through adoption or foster care in 2021.
Families who added a parent, nephew, niece or grandchild (who were not listed as a dependent on their 2020 income tax return) may also get a 2021 Recovery Rebate Credit of up to $1,400 for these dependents as well — all done on 2021 Form 1040.
Possibility 4: You might get a larger refund if you opted out.
You might even get a larger refund if you opted out of receiving the six monthly advance credits when you were actually eligible. If your household has eligibility, you can expect a sizable credit if you opted out of the advance payments and if you qualify for the full amount. This means that you could claim the full credit when you file your 2021 taxes. You may find that you qualify for $3,600 credit per child younger than age six and $3,000 per child between ages six and 17.
Possibility 5: You can reconcile missing payments.
Think you have missing payments? You can recover missing payments when you file your 2021 taxes by filling out the IRS Form 8812.
What Will Happen with the Child Tax Credit in 2022?
The December 15 payment was the last one for the extended stimulus Child Tax Credit. So far in 2022, the Child Tax Credit won’t stay the same as the expanded child tax credit in 2021. The program will look like it did before the expanded program. Eligible families can receive:
- A $2,000 credit per dependent under age 17.
- Income thresholds of $400,000 for married couples and $200,000 for all other filers (single taxpayers and heads of households).
- 70% partial refundability for individuals whose tax bill falls below the credit amount.
The Build Back Better Act was supposed to be the saving grace of the current child tax credit — the Build Back Better Act had addressed health care, childcare, education and climate change but Senator Joe Manchin, who announced shortly before the end of 2021 that he could not support the bill.
A separate bill just to extend the 2021 child tax credit enhancements may be met with approval but reaching an agreement among 50 Democratic senators and swinging a majority in the House might not happen.
Be Aware of Tax Filing Implications
So, what should you do next?
Kind of like your Social Security number, you want to guard your money. That includes doing the right things with the post-pandemic advance child tax credit payment you may (or may not have) received last year.
It’s best not to assume that child tax credit payments will work in your favor. You might get less than you thought through your refund, so make sure to save a chunk of change in your emergency fund for expenses — your tax refund may not cover your summer vacation to Yellowstone after all. It’s also a good idea to consider paying down debt so you don’t find yourself in a pickle when you don’t get the full refund.
Keep track of your IRS communication. Did you get a letter in the mail last month that detailed the full amount you received in 2021? If so, it’s a valuable piece of information you’ll need to complete your 2021 taxes. Hand it off to your tax professional or, if you’re doing your taxes yourself, be aware of where that important piece of paper is located.
You may also want to consider not waiting until the last minute to file your taxes. The year 2021 was a strange tax year to rival 2020, so consider getting your taxes done early to make sure you hunt down the documents you need and get your questions answered. The sooner you do all of that, the sooner you can receive your eligible refunds.
Next year changes things, so ask your tax preparer for more details of what you should do if a new plan comes down the pike from Congress.
Ready for more great tax information from UNest? Read our blog for a comprehensive suite of information about taxes, saving for college and even building your child’s nest egg with cryptocurrency.
This material is for informational purposes only and should not be construed as financial, legal, or tax advice. You should consult your own financial, legal, and tax advisors before engaging in any transaction. Information, including hypothetical projections of finances, may not take into account taxes, commissions, or other factors which may significantly affect potential outcomes. This material should not be considered an offer or recommendation to buy or sell a security. While information and sources are believed to be accurate, UNest does not guarantee the accuracy or completeness of any information or source provided herein and is under no obligation to update this information.