The child tax credit (CTC) is a very important tax credit that grants up to $2,000 in tax credits for the 2021 tax season. With high value and high refundable amount, the child tax credit is expected to be claimed by millions of families in 2021.
Before we get to the child tax credit, let’s explain to what a tax credit is. While deductions you claim on your tax return reduces the taxable income, tax credits reduce the amount owed to the IRS. With that said, tax credits are much valuable than deductions overall.
Since you withhold tax or make estimated tax payments, you may end up not owing to the IRS though. It would first come to mind that the child tax credit would become worthless in this situation. This is completely wrong as it is a refundable tax credit. If you don’t owe the IRS, the child tax credit will contribute to your tax refund but not at a dollar to dollar value. Learn more about the refundable part of the child tax credit below.
Child Tax Credit 2021 Qualifications
Those who plan on claiming the child tax credit must meet the seven requirements known as the tests. In order, these “tests” are:
- Age Test
- Citizenship Test
- Dependent Test
- Relationship Test
- Residence Test
- Support Test
- Household Income Test
In the above order, the child must meet the following requirements in order for you to claim the 2021 child tax credit.
The child must be under the age of 17 at the end of the tax year. The maximum age is 16 years, 11 months, 29 days.
The child must be a U.S. citizen, U.S. national, or a U.S. resident alien.
The child must be claimed as dependent on your tax return.
The child must be related to you. He or she can be your own child, adopted child, foster child, stepchild, brother, sister, stepbrother, stepsister, or a descendant of any of these individuals such as your grandchildren, niece, or nephew.
The child must have lived with you for more than half of 2020. However, there are exceptions to this. If the child went on for a school vacation, business, medical care, military service, or detention in a juvenile facility count as lived with you.
The child must not have provided more than half of her or his financial support during the tax year.
Household Income Test
The phaseout threshold for the child tax credit begins at $200,000 for single filers and $400,000 for joint filers.
There had been significant changes to the child tax credit with the Tax Cuts and Jobs Act of 2017. The change doubled the child tax credit amount and increased the income thresholds along with the refundable portion of the child tax credit.
The child tax credit is a refundable credit. From 2018 through 2025, as much as $1,400 of the child tax credit is refundable. This means if you don’t owe taxes, you may get $1,400 more in your tax refund with the child tax credit.
However, the $1,400 is the maximum refundable portion. Let’s say you owe $300 in taxes and claim the child tax credit for one qualifying child you have. This means your refund amount would still be $1,400 as the rest $600 covers the amount owed. Having said that, to get the full refundable amount and pay taxes with the nonrefundable portion, your tax bill must be $600 or less.
Use Form 2441, Schedule 3, and Form 1040 or 1040-SR to claim the child tax credit.
Although the child tax credit refundable is a great way to boost a tax refund, it shouldn’t be your priority. There are plenty other ways where you can gain more value by adjusting deductions. Learn more on how to maximize tax refund in 2021 from our homepage.