The child tax credit: Reconcile's guide to using this important money-saving deduction.

March 19, 2021
The child tax credit: Reconcile's guide to using this important money-saving deduction.

Child Tax Credit: The American rescue plan explained

Do you have children or dependents who are under 17 years of age? Well, then you are likely to qualify for Child Tax Credit.

This credit comes as a boon to taxpayers as it reduces your federal income tax bill by up to $2,000 per child for the 2020 tax year. In 2021, the American Rescue Plan — passed to help in recovery from the COVID-19 financial turmoil — expanded the child tax credit and makes it available to even more Americans.

What is Child Tax Credit?

The Child Tax Credit is one of three child-centric federal tax credits that are among the most efficient ways to minimize your tax bill. At a basic level, the Child Tax Credit is a credit that parents and caregivers can claim to aid in diminishing their tax bill, subject to the number and ages of their dependents.

How to qualify for Child and Dependent Care Tax Credit

  1. Age: The child must be 12 or under
  2. Dependents including spouses don’t have an age mandate.
  3. If you’re married, filing as married jointly is mandatory.
  4. You must be working to earn — money you earned from a job. Commissions, Interest, Dividends are not counted as income.
  5. You must provide the care provider’s name, address, and Taxpayer Identification Number — either SSN or EIN

The following are ineligible for credit payments i.e., caregivers who are:

  1. Your spouse
  2. A parent of the dependent child
  3. A dependent listed on your tax return
  4. Your child who is age 18 or younger

Bear in mind that eligible expenses can go over and above physical care and household expenses such as domestic help or paying someone to cook.

The process: How do I apply for child tax credit?

You will be able to procure your tax credit through Form 1040, U.S. Individual Income Tax Return, Form 1040-SR, U.S. Tax Return for Seniors or Form 1040-NR, U.S. Nonresident Alien Income Tax Return.

What's changing under Biden's  American rescue plan? 

On 6th March 2021, the Senate voted to pass the $1.9 trillion American Rescue Plan Act, embracing provisions that up the child tax credit to $3,000 per child ages 6 to 17 and $3,600 yearly for children under 6 for the tax year ending 2022.

The American Rescue Plan will give more money to families for the time being. Here's everything that changes:

  1. The Credits have been increased from $2,000 to $3,600 per child under the age of 6 and $3,000 for children older than 6.
  2. The credit would also be fully refundable.
  3. Money from the credit will be split: Half will be paid through the tax refund and the remaining will be paid monthly from July to December.
  4. There is no $2,500 earnings floor i.e., lowest acceptable wage limit.
  5. Families established in Puerto Rico are also eligible to receive the credit

Another refundable tax credit that the working families and individuals can avail is the Earned Income Credit. The families with children have the advantage of receiving larger credit than the ones without.

Understanding the Earned Income Credit

The earned income credit, or the earned income tax credit (EITC) was set in motion to keep families out of poverty while invigorating the public to work. The EIC is only applicable to low-income earners and some middle-income families.

2020 EIC income limits

 

Number of Children

Single or Head of Household

Married Filing Jointly

Maximum Amount of Credit

0

$15,570

$21,370

$529

1

$41,094

$46,884

$3,526

2

$46,703

$52,493

$5,920

≥3

$50,162

$55,952

$6,557

 

Moving onto 2021 taxes, these figures will change slightly.

2021 EIC income limits

 

 

 

Number

of Children

Single or Head of Household

Married Filing Jointly

Maximum Amount of Credit

0

$15,980

$21,920

$543

1

$42,158

$48,108

$3,618

2

$47,915

$53,865 

$5,980

≥3

$51,464

$57,414

$6,728

Who qualifies for the Earned Income Credit?

You may claim the EITC if your income is below $57,414. However, the amount of your credit may change based on factors like having children, dependents, or are disabled.

The bottom line

The Child Tax Credit is an existing beneficiary program that decreases the tax burden of families with dependent children. For the 2021 tax year, the program has been expanded to give bigger checks to parents, pulling kids out of poverty, allowing more of the credit to get refunded and enable families to get an advance on their refund in the second half of this year.

You can use online tax filing tools like TurboTax, TaxACT, H&R Block to process the credits for you.

We'd also suggest reading up on our article how to file your taxes the right way and get better savings and better outcome.

“What about my refund?”

Fret not, you can track your refunds with Reconcile in seconds so that you can worry about other important things in your life.

Get started with Reconcile for free.

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