Child Tax Credit: The Ultimate Guide

November 11, 2021
financial literacy

Any parent will tell you bringing up children can be incredibly expensive. 

As soon as you bring them home, the costs start to materialize out of thin air. It all starts with diapers — but before you know it, it’s soccer fees, school trips, paying for college, weddings, and everything in between.

No matter how much money you’re bringing in, kids can put a serious strain on your wallet. Fortunately, the U.S. government offers some relief to qualifying families in the form of child tax credits.

This guide will explain what child tax credits are, who qualifies for child tax credits, what’s changed about the program in 2021, and how to apply.

What is the Child Tax Credit?

The child tax credit is a tax benefit extended to U.S. families based on how many eligible dependent children they have.

Launched as part of the Taxpayer Relief Act of 1997, the Internal Revenue Service (IRS) child tax credit is designed as a financial boost to help U.S. taxpayers support their families. 

That being said, you don’t actually need to be an existing U.S. taxpayer to qualify for child tax credits — but we’ll get to that in a minute.

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The current child tax credit for 2021 is $3,600 for children under age 5 and $3,000 for kids ages 6–17.

In order to be eligible for the U.S. government’s child benefit program, the child that you’re claiming the credit for will need to be under the age of 18.

For the purposes of the child tax credit, the IRS defines a “qualifying child” as a son, daughter, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them. By descendant of one of the above, the IRS is talking about grandkids, nieces, or nephews.

It’s also important to note that adopted children qualify, too. As long as a child has been lawfully placed with you via a legal adoption route, that child should be eligible for the child tax credit.

If you qualify for the child tax credit, it’s probably going to be a huge benefit to your finances. 

The U.S. government is essentially offering you a helping hand by reducing your tax burden because you have dependents you’re caring for. Better yet, the credit program is currently more inclusive than ever in terms of eligibility requirements.

Although the child tax credit has been around for decades, the credit program has been recently expanded as part of the American Rescue Plan Act of 2021. We’ll touch upon those changes and what they mean for U.S. taxpayers shortly. 

But first, let’s zoom in and explore exactly who is eligible for the child tax credit.

Who's Eligible for The Child Tax Credit?

If you’re reading all of this thinking that the child tax credit sounds like a great opportunity, you’re in luck.

Nearly every U.S. family with one child or more qualifies for the child tax credit — but it’s important to bear in mind that there are some caps and thresholds. As you might expect, those caps are largely based on your family’s income.

How much the government is willing to give you as part of the child tax credit program depends on your modified adjusted gross income (MAGI) for 2021. The IRS will have worked that number out by looking at the most recent IRS tax return that you’ve submitted.

Although a whole lot of American families are eligible for the child tax credit, there are two phase-out points the IRS uses to reduce payments.

The first phase-out comes into effect if your MAGI in 2021 exceeds $150,000 if you’re married and filing a joint return with your spouse. If you’re filing as a head of household, the threshold is $112,500. If you’re a single filer or you’re married and file a separate return from your spouse, the phase-out starts at $75,000.

If you earn above this amount, your child tax credit will be reduced to just $2,000 per qualifying child.

Once your family’s income has reached a second threshold, you won’t qualify for any child support from the credit program. 

The second child tax credit phase-out comes into force at $400,000 if you’re married and have joint-filed with your spouse. If you have any other filing status, the second phase-out starts if your MAGI hits above the $200,000 mark.

To be clear: your child tax credit shouldn’t drop below $2,000 if you’re earning less than whichever one of these two thresholds is applicable to you. 

But once you’ve started earning above $200,000 (or $400,000 if you file a joint return), the IRS will start reducing your child tax credit payments again.

Your payment will decrease by $50 for every $1,000 worth of income you are over the second phase-out threshold.

Illustration of child walking from one adult to another

What’s Changed about the Child Tax Credit in 2021?

The child tax credit program has been around for a pretty long time. But in 2021, the U.S. government decided to increase the amount of money it was willing to offer most families. 

This change was largely brought about as a result of the global COVID-19 pandemic as a way to help struggling families get by.

Changes to the child tax credit were introduced in March 2021 as part of the American Rescue Plan.

The American Rescue Plan increased the child tax credit from $2,000 per child under the age of 6 in 2020 to $3,600. For each kid aged between 6–16, the new legislation has increased the amount of child tax credit from $2,000 to $3,000.

The expansion also allows parents to claim the child tax credit on 17-year-olds for the first time. Like 16-year-old children, all dependents aged 17 are eligible for up to $3,000.

Infographic showing what's changed about Child Tax Credit in 2021
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It’s also important to note that before the American Rescue Plan, low-income families in the U.S. tended to get different amounts of child tax credits. 

But under the new rules, all low-income families will be getting the exact same amount in payments. Amounts won’t change or go down at all until families start to reach the phase-out income thresholds we talked about above.

According to researchers, the new rules should reduce the number of young Americans living below the child poverty line by 45%.

But those weren’t the only changes to the child tax credit payment scheme in 2021.

To try and help get money to families in need faster, the American Rescue Plan has enabled the IRS to start sending out a monthly child tax credit payment to qualifying families.

These monthly installments are called “advance payments,” and they started in July 2021. The IRS can send up to half of your annual child tax credit entitlement in advance payments — we’ll get to the logistics of those payments shortly.

You should also bear in mind that, whether you’re getting advance payments or not, the child tax credit is now going to be broken up into monthly payments moving forward. 

This means that families can receive monthly payments of up to $300 per child if they’re under age 6. For kids ages 6–17, monthly payments will be up to $250 per eligible child.

After you’ve filed your taxes for the new tax year, you’ll then receive a lump sum of whatever amount of your annual entitlement is outstanding.

What are Advance Child Tax Credit Payments?

Thanks to the changes to the child tax credit program that we’ve already covered, a lot more families are going to start getting advance payments of child tax credit in 2021.

Those payments kickstarted in July 2021, and they add up to half of the total child tax credit amount you’re owed on an annual basis.

That means half the money you’re eligible to receive as part of the child tax credit program will get paid out to you in monthly installments. You won’t get the other half of your benefit entitlement until you’ve filed your tax return for the next tax year. 

After filing, you’ll then get to claim the other half of your entitlement.

If you qualify for child tax credits, advance payments will be sent to you automatically. That means as long as the IRS has your tax information, you don’t have to do anything in order to start receiving payments. They should just start to be sent to you automatically.

Although most eligible families will qualify for advance payments automatically, there are a couple of requirements you and your family need to fulfill.

First, to qualify for a child tax credit advance payment, either you or your spouse must have filed a 2019 or 2020 tax return and claimed the child tax credit on the return.

Infographic explaining introduction of advance payments
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If you didn’t file your taxes in 2019 or 2020, don’t worry. There’s still a way you can qualify for child tax credits.

You should still be eligible to receive payments if you gave your information to the IRS in 2020 in order to receive the Economic Impact Payment, more commonly known as the “stimulus check.” 

As a non-filer, you would have had to use the IRS “Non-Filers: Enter Payment Info Here.” The same applies if you gave your information to the IRS using the “Non-Filer: Submit Your Information” tool in 2021.

If you opted for either of these methods to submit your data to the IRS, you or your spouse (if you’re joint filing) must also have lived in your main residence in the U.S. for at least six months. 

Bear in mind this only applies to the 50 U.S. states and the District of Columbia. 

U.S. territories aren’t eligible, unfortunately. 

Finally, to qualify for advance payments, you’ll need to have had at least one qualifying child who was under age 18 at the end of 2021 and who has a valid Social Security number. As we’ve already mentioned, you’ll also need to have made less than the phase-out earned income limits.

How to Apply for The Child Tax Credit

If you qualify for child tax credit payments, you’re probably going to want to take the government up on that. After all, you’re essentially being offered free cash. Fortunately, applying for child tax credits isn’t an issue.

Believe it or not, you don’t have to apply to get child tax credits. The IRS automatically takes your information and identifies you for the scheme without you needing to lift a finger.

That being said, the IRS advises that you have to file your taxes using the guidelines posted on Schedule 8812 to make sure that the information you’ve provided is sufficient.

If you did file your taxes, this information should have been submitted via IRS Form 1040.

Screenshot of IRS Form 1040
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Based on the tax information that you’ve provided, the IRS will look at your data and make a decision on whether you qualify for the program. If you are eligible, then the IRS will automatically enroll you to start receiving advance payments starting in 2021.

Taxpayers don't have to carry out any additional steps to get those advance payments.

Translation: if you filed taxes this year (for the tax year 2020) or filed last year (for the tax year 2019), the IRS should automatically be sending you monthly payments as of July 2021.

If you didn’t file taxes for these years, you can still enroll for the child tax credit if you signed up for Economic Impact Payments (stimulus checks) throughout the COVID-19 pandemic.

Again, try not to lose hope if none of these conditions apply to you. You can still access the child tax credit program without having filed your taxes or received Economic Impact Payments. 

This year, the U.S. government teamed up with non-profit organization Code for America to create an official non-filer sign-up tool that eligible non-taxpayers can use to sign up for child tax credits. This sign-up form is available in both English and Spanish.

If you haven't already received any sort of stimulus payment, you can also use this sign-up tool to apply for any past, existing, or future Economic Impact Payments that may apply to you and your family.

How to Update Your Child Tax Credit Information

If you’re having trouble accessing your advance payments for the child tax credit or your personal details have changed, you can make sure everything is up-to-date using the IRS Child Tax Credit Update Portal.

The portal is designed to help families check if they’re enrolled for advance payments. But if they would like to, filers are also allowed to unenroll from advance payments.

The portal also lets you update your bank account and contact information to make sure that you don’t miss any advance payments. 

They should be coming straight into your bank account through a direct deposit — so if the payments aren’t showing up, the portal should be your first port of call to find out why.

It can also be used to look at data pertaining to any child tax credit payment that has already been made to you.

Screenshot of IRS login screen
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When in doubt, it’s a good idea to log into the IRS Child Tax Credit Update Portal every so often just to make sure all of the information the IRS has about you is totally accurate — that way, you’re not going to miss out on any free money.

If you filed your most recent federal tax return jointly with your spouse, any updates you make on the portal will only affect your advance payments. They won’t affect any advance monthly payments being made to your spouse.

To register for the IRS Child Tax Credit Update Portal, you’ll need to have an existing IRS username or an ID.me account. If you don’t have either one of these accounts already, you can still register — but you’ll need valid and official photo identification to sign up.

Conclusion

At this point, we’ve covered just about everything there is to know about the U.S. government’s child tax credit scheme.

The child tax credit is a decades-old system designed to help out American families with cash payments for each qualifying child. But fortunately for all of those families, the expanded child tax credit scheme has become even more inclusive in 2021 thanks to the changes made by the American Rescue Plan.

Moving forward, the amount eligible taxpayers and other families that can receive has gone up by quite a lot — and the scheme has also been expanded to cover dependent 17-year-olds. 

Just remember that there are income thresholds, so your child tax credit payments might be less than the maximum amount depending on how much you or your spouse has earned in the most recent tax year.

Do you want to learn more about taxes and investing in a child’s financial future? You’re in the right place.

Check out the EarlyBird blog and download the app now to find out how you can start saving for the kids you love.

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