What is the Child Tax Credit?
2021 CHILD TAX CREDIT CALCULATOR
- You must have resided in the U.S. for 6-months during 2020 to be eligible for the “EXTRA” amount
- As you have dependents, your filing status will be Head of Household.
- If you’re married to an American or a Green Card Holder, choose Married Filing Jointly, unless you specifically know that you are Married Filing Separately.
- Head of Household is a better filing status than Married Filing Separately.
- If you didn’t live in the U.S. during 2021, you may be eligible for the standard Child Tax Credit Refund.
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The Child Tax Credit (CTC) is a refundable credit that reduces families’ tax liability by a certain amount per qualifying child. If the overall tax due is reduced below zero because of the credit, that amount is refunded to the taxpayer(s). This credit phases out for high-income earners and has increased for 2021 for certain situations.
How much Child Tax Credit can I get?
The American Rescue Plan has increased the CTC available for 2021 for families that spend at least 6-months in the U.S. The amount awarded for 2021 is up to $3,600 per child under the age of 6, and $3,000 per child between the ages of 6 and 17. For families that didn’t spend at least 6-months in the US, the standard Child Tax Credit Refund continues to be available. The maximum credit is $2,000 ($1,400 refundable) per qualifying child.
What is a Refundable Tax Credit?
You can receive a refund greater than the amount of tax you have paid. Basically, if your credit is greater than what you owe, then the IRS will pay you the difference. For many American families living abroad, they don’t ever owe US tax, so the credit becomes fully refundable, even if they haven’t paid a cent of tax to the IRS.
The credit is $2,000 per qualifying child, but the maximum refundable amount is $1,400 per qualifying child.
This means a family with 3 qualifying children could expect a refund of $4,200 ($1,400 x 3) each year without paying a single cent of tax to the United States.
Who can claim for the Child Tax Credit? Is my child eligible for the CTC?
Children must be US citizens with a valid Social Security Number. Children must be under the age of 17 (16 years old or younger) at the end of the tax year, to qualify for the CTC. They must be claimed as a dependent on your return and have lived with you for more than half of the tax year. You must have also paid for at least half of their upkeep during the year.
Example:
- Like most Americans living abroad, you probably won’t have to pay any US tax if your return is prepared correctly.
- You have two children aged 0-16 with their own SSNs.
- You’re working and paying tax in the country you’re living in.
- You can expect a refund of US$2,800 ($1,400 x 2) – real money in your pocket.
- You pay zero tax to the IRS.
- Claim the refund every year until your child turns 17.
How does the Child Tax Credit phase out?
The credit available starts to decrease at $112,500 of income for single parents, or at $150,000 for married couples. This decreases at a rate of 5% of the AGI (adjusted gross income) over the amount until reaching pre-2021 levels. The CTC is further reduced by 5% of AGI over $200,000 for single parents, or at $400,000 for married couples.
The credit is fully refundable. If the amount of credit awarded exceeds taxes owed, the excess amount may be received as a tax refund. Low-income families can qualify for the maximum credit, regardless of income.
What is happening to the Child Tax Credit in 2022?
From 2022, the credit is reverting back to prior-law levels, as established by the 2017 Tax Cuts and Jobs Act (TCJA). This will be in effect from 2022-2025.
You will be able to claim CTC of up to $2,000 for each child under the age of 17. This credit will decrease by 5% of AGI over $200,000 for single parents, or $400,000 for married couples.
If the credit awarded exceeds taxes owed, up to $1,400 will be given as a tax refund called 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 if I’m way behind on my U.S. tax returns?
There is a special IRS program to help you catch up on your U.S. taxes safely, without fines and penalties
STREAMLINED AMNESTY
It’s for American citizens that didn’t know they had to file U.S. tax returns each year, and have therefore fallen behind. Some more than 30 years! With the IRS Streamlined Procedure, say goodbye to overdue tax returns, late fees, and penalties. If you have children, we can backdate your Child Tax Credit Refund for 3 years.
Get a quote here.
What impact is the CTC going to have?
The CTC is being distributed periodically by the IRS in 2021 (to families based in the US), rather than as a lump sum during the 2022 tax season. 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).
Under prior law, 89% of families with children received an average CTC of $2,310. The Tax Policy Centre now 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).
$500 credit for ‘other dependents’
‘Other dependents’ are eligible for a non-refundable credit up to $500 each. Under the TCJA (Tax Cuts and Jobs Act), dependents not eligible for the $3,600 or $3,000 credits can access a $500 credit. Those eligible for the $500 credit include children aged 18 and children aged 19-24, who were 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.
History of the Child Tax Credit:
The Child Tax Credit (CTC) was created in 1997 as part of the Taxpayer Relief Act, with an original credit of $400 per child under the age of 17. This credit was non-refundable for the majority of families.
The CTC was increased to $500 in 1998, then increased again and made refundable in 2001. To coordinate with the earned income tax credit (EITC), once earnings in 2001 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 phase-in of the refundable CTC was broken off from the EITC.
The CTC was then increased again in 2012 as a result of the American Taxpayer Relief Act. The credit was increased from $500 per child to $1,000 per child. 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 threshold permanent.
In 2017, the Tax Cuts and Jobs Act doubled the CTC for children under 17, from $1,000 to $2,000 per child. The refundable portion of this credit was indexed to inflation and limited to $1,400 per child. This became effective in 2018.
As of 2020, inflation had not risen enough to trigger an increase. Legislation has also allowed dependents who did not qualify for the $2,000 credit to be able to claim a non-refundable 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.
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