Most of us found 2020 to be a pretty difficult year. Many people saw their income decrease, and parents of young children were faced with the need to keep their kids safe, fed, happy, and educated through the pandemic. In the best of times, parenting is challenging. Under the circumstances many parents faced last year, it sometimes felt impossible.
Fortunately, the federal child tax credit offers parents some financial relief. Even better, the American Rescue Plan enacted by Congress and signed into law by President Biden, temporarily expands the credit to offer parents in Ohio and across the US some extra support for financial stress caused by the pandemic. Learn more about the child tax credit, the stimulus, and what it all means for you and your family.
What is the Child Tax Credit?
The child tax credit is a credit against taxes owed by parents of children under the age of 17. It is not a deduction. A deduction is a reduction in the amount of income on which your taxes are calculated, but a credit is a direct dollar-for-dollar reduction in the amount of tax you owe. If a tax credit is refundable, that means if the amount of the credit is greater than the amount of tax you otherwise would have owed, the difference is refunded to you. The child tax credit is always paired with the child dependency exemption.
For tax year 2020, the child tax credit was worth $2,000 per child under 17 claimed as a dependent on your income tax return. To be eligible, the child must have been related to you, have lived with you for at least six months of the tax year, and be a citizen of the U.S. (or a U.S. national or resident alien with a Social Security number).
The credit starts to phase out at $200,000 of adjusted gross income (AGI) for parents filing as single or head of household. For parents filing a joint income tax return, the child tax credit begins to phase out at $400,000 of AGI. For taxpayers with AGI over the threshold, the credit is reduced by $50 for every $1000, or portion of $1000, above the threshold.
The child tax credit for tax year 2020 is partially refundable, up to $1,400 for certain families with lower income. However, in order to be eligible for a refund, you must have had at least $2,500 in earned income during the year.
How Does the American Rescue Plan Affect the Child Tax Credit?
The American Rescue Plan has made a number of (temporary) changes to the child tax credit for 2021, but those changes will be a great benefit to many families.
First, the American Rescue Plan expands the age range of children for whom the child tax credit is available; in 2021, taxpayers with 17 year olds may claim the credit for them as well as for younger children. What’s more, 18 year old dependents can qualify for up to $500 a piece, as can 19 to 24 year old dependents attending college full-time. Babies born or adopted even late in 2021 also qualify for the credit, assuming that they are U.S. citizens; and they are considered to have resided in the household for the entire year, regardless of their birth date.
Second, the amount of the credit is increased from $2,000 to $3,000 per child. For children under age 6 the credit can be as much as $3,600. The AGI limit for that higher amount is $75,000 for single filers, $112,500 for heads of household, and $150,000 for joint filers, after which the temporary increase to the credit begins to phase out. However, even parents whose income disqualifies them for the additional $1,000 or $1,600 credit in 2021 can still claim the regular $2,000 child tax credit.
Third, the credit is now fully, rather than partially refundable: A parent who owed $0 in taxes could receive a refund of up to $3,600 per child. Fourth, there will be no income floor for the refundable credit; even parents who earn less than $2500 qualify for the full amount.
Fifth, the American Rescue Plan requires that half the credit be paid in advance in monthly installments from July 2021 through December 2021. This gives parents financial relief they need long before they have to file their 2021 taxes.
For Separated or Divorced Parents, Who Gets the Child Tax Credit?
Separation, divorce, and co-parenting can complicate income tax filing for parents. Parents who live apart from one another, whether they have a sole residential or shared parenting arrangement, know that only one of them can claim the child as a dependent in a given year. The child tax credit will always be paired with the dependency exemption. This new tax credit has the same rules.
Only one parent can claim the child tax credit for a child in 2021, and it’s not simply a matter of who files first.
So who gets it? This can be a problem, especially for parents who have agreed to claim a deduction for their child in alternate years. The IRS looks at the last filed income tax return in deciding how to send out stimulus checks and credit payments.
So for example, when sending out the late 2020 stimulus check, the IRS looked at 2019 income tax return. The parent who claimed the child in 2019 got the stimulus for the child, even if the parent who claimed the child in 2020 was entitled to it. Similarly, the child tax credit payments that will start going out in July 2021 to the parent who claimed the child in 2020, not the one who is claiming the child (and is entitled to the tax benefits) for 2021.
If you claim the child tax credit for a child for 2021 when you were not entitled to, you will have to repay any money to which you were not entitled. Our office has dealt with many cases trying to get stimulus payments and other tax benefits to the parent who should have received them. The bottom line is, if you would want your co-parent to deal fairly with you, deal fairly with him or her. The person to whom the IRS sends the check is not necessarily the person who should get it. Pay attention to your court order, and be aware of your rights and obligations. Share when you should share, and make sure any funds that flow to you or your co-parent benefit your child.
Unfortunately for parents who are owed back child support, advance child tax credit payments going out monthly in 2021 cannot be garnished to pay child support arrears. However, when the parent who is in arrears files their 2021 tax return in April 2022, the amount they claim as a credit could be subject to offset.
If you have more questions about the child tax credit or how separation and divorce affects your finances, please contact Melissa Graham-Hurd & Associates to schedule a consultation.