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Important Info to Know About the Child Tax Credit and its Tax Implications



The child tax credit changed for tax year 2021 and quite frankly, it can get confusing. While it’s good news that it increased, it can be a source of confusion for many. Here’s what you must know about the child tax credit for 2021.


How Much is the Child Tax Credit for Tax Year 2021?


The child tax credit for tax year 2021 increased from $2000 per child to $3,600 for children under 6 years old and $3,000 for children ages 6 – 17. The child tax credit is a refundable credit. This means you can get the full credit even if it exceeds your tax liability. This is unlike a non-refundable credit that maxes out when your tax liability reaches $0.


What were the Advanced Child Tax Credit Payments?


All families with children were eligible for advanced child tax credit payments payable from July through December 2021. If you took the payments, you’ve received 50% of your child tax credit already.


If you received all six payments, you received 50% of your child tax credit. The number of months you took the credit decreases the tax credit you can claim on your taxes when you prepare them. For example, if you took 2 months of the credit, you’ll get a prorated credit for the remaining 10 months.


If you didn’t take any advance payments, you can claim the full credit on your 2021 tax return.


What Happens if your 2021 Income is too High to Take the Credit?


The adjusted gross income limits for 2021 taxes are high, but if your income exceeds the limits, your child tax credit will be prorated.


The limits are as follows:

  • Married filing jointly - $150,000

  • Head of household - $112,500

  • Single - $75,000


The child tax credit is ‘phased out’ based on your income. The first phaseout is for the additional $1,600 or $1,000 in the child tax credit amount for 2021. If your income exceeds the total threshold, your child tax credit reduces to $0.


Will you Pay Taxes on your Advance Child Tax Credits?


It seems like you pay taxes on every bit of income you receive, so you likely worry that you’ll pay taxes on your advance child tax credits.


Here’s the good news.


You don’t have to pay taxes on the funds. They aren’t considered income. They were an advance payment of a credit you will likely be eligible for when you file your taxes.


Will you Have to Pay Back your Advance Child Tax Credit?


Most people won’t have to pay back their advance child tax credit, but if you received more than you’re entitled to because your income was too high, you might. You might also have to pay it back if you no longer have qualifying children or you received more than you were entitled to receive.


Final Thoughts


Claiming the child tax credit, deciding if you made too much money to get it, or figuring out how much of the credit is left for you can be confusing. Let the experts at Henson & Murtha CPAs help you make sense out of it and file your taxes correctly. Contact us for a complimentary consultation.

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