Raising children is more expensive than ever- one reason why birth rates have dropped over the past 50 years. To combat that decline, the IRS has added a child tax credit (CTC) to put a little more money in parents’ pockets.
The CTC started back in 1997, and it was originally $400 per child, raised to $500 in 1998. The credit was doubled to $1,000 in 2012 and doubled again to $2,000 per child in 2018. In 2021 only, as a part of the American Rescue Plan, it went up to $3,000 per child 17 or under ($3,600 for those under 6). And in 2025 unless congress acts it will fall back to $1,000. The changing rules and amounts have been a challenge, and 2021 has added another new wrinkle.
For the second half of 2021, unless a family opted out, the IRS began mailing monthly checks as an Advanced Child Tax Credit. This has never been done before and is credited with greatly reducing childhood poverty. The advance, however, does reduce the amount of CTC available at tax time, which will lower some refunds. And here’s where it gets interesting.
What happens to the advances if a divorced couple alternates claiming of a child from year to year? What if a child is born in the middle of the year? And what if the advances get mailed out but never reach their target because the family moved? These are all problems that the IRS and families will have to deal with this year, with the bottom line being that those who can claim a dependent child 17 or under for 2021 getting the full CTC amount one way or another, as long as their income doesn’t rise above certain thresholds. (For a married couple the amount starts going down when income passes $150,000 and goes away completely if income passes $400,000).
For those who receive the advances but don’t claim a child for 2021, they may have to pay back the amount of the advance, though for incomes of under $120,000 there may be repayment protection. There was also a way to opt out of the advances, and if congress ever reauthorizes them there will be a way to opt out again.
The latest attempt to extend the enhanced CTC was in the Build Back Better Act, which passed the House but failed in the US Senate. It’s unclear if there are enough votes there to change things for 2022, so families need to expect the old 2020 rules to be back in place. But for now, when paired with the other two child-related tax credits (Earned Income and Childcare) parents could see over $10,000 in credits added to their refunds for 2021.