The Child Tax Credit has been available to taxpayers since 1997 when it was first launched under the terms of the Taxpayer Relief Act. It’s undergone a few tweaks and changes since then, but none as significant as those that affected 2021. The American Rescue Plan (ARP) made the credit particularly advantageous for the most recent tax year, but, unfortunately, the changes aren’t permanent. The credit is slated to revert back to its previous terms in 2022 unless Congress takes steps to intervene.
The changes for tax year 2021 allowed eligible Americans with children to receive half their credits in advance. They didn’t have to wait until 2022 to file their tax returns to claim that money. Payments were sent out from July through December of 2021. Taxpayers can claim the balance of the tax credit when they file their 2021 returns in 2022.
- Advance payments of half of the 2021 Child Tax Credit were sent to qualifying taxpayers on a monthly basis from July through December 2021.
- The advance payments were based on information contained in your 2020 or 2019 tax returns, so they may not have accurately reflected your family and income circumstances in 2021.
- You must reconcile the advance payments on your 2021 tax return when you file it in 2022. This could result in owing the IRS if you were overpaid, but the IRS exempts lower-income taxpayers from this rule.
- You can claim the full credit on your 2021 tax return if you were entitled to advance payments but didn’t receive them for some reason.
What Is the Child Tax Credit?
The Child Tax Credit (CTC) shouldn’t be confused with a tax deduction. A deduction merely subtracts from your income so you pay taxes on less money. That’s certainly a good thing, but a tax credit subtracts directly from what you owe the IRS when you prepare your tax return. The Child Tax Credit allowed you to deduct $2,000 for each qualifying child dependent under age 17 under the terms in place in tax years 2018 through 2020.
Then came 2021. The American Rescue Plan increased that $2,000 per child to $3,000, and to $3,600 if your child was younger than age 6. The age limit was 16 in 2020. The ARP increased this to age 17.
The credit in the past wasn’t fully refundable. A refundable tax credit will erase what you owe the IRS and the agency will send you any money that’s left over. The ARP made the Child Tax Credit fully refundable in 2021.
The Child Tax Credit is slated to shift back to 2020 terms in 2022, the tax return you’ll file in 2023. But you still can claim the balance of the 2021 credit when you file your tax return in 2022 if you haven’t received advance payments or if you opted out of advance payments for some reason.
Who Is Eligible for the Credit?
Both child dependents and their parents must qualify for this tax credit.
Rules for Child Dependents
Your child must have been no older than age 16 as of Dec. 31, 2020, before the ARP rules came into effect, and this age rule comes back in 2022. The age cap was 17 in 2021. Your child must not have reached age 18 before Jan. 1, 2022.
They must be your biological child, adopted child, stepchild, foster child, sibling, or descendants of any of these individuals. They must live with you for more than half the year, and they can't provide more than half their own support.
Eligible children must additionally have a Social Security number.
A few exceptions to the qualifying rules for eligible children do exist. You can find them in IRS Schedule 8812, or consult with a tax professional if your child narrowly misses qualifying under these rules.
Rules for Parents
Parents are subject to their own qualifying rules, the most important applying to their incomes.
Married taxpayers who file joint returns were limited to incomes of $150,000 or less in 2021. Heads of households were capped at incomes of $112,500, and single taxpayers could not have incomes of more than $75,000. The $3,000 and $3,600 credits began reducing after you reached your applicable income threshold.
These income thresholds apply only to the advance Child Tax Credit payments. Parents who earned more are still able to claim the CTC on their 2021 tax returns, but under the pre-2021 rules.
Parents must have Social Security numbers or Individual Taxpayer Identification Numbers. They must claim their qualifying children as dependents on their tax returns. They must have lived in the U.S. for more than half the 2021 tax year, or file a joint return with a spouse who did so. This doesn’t necessarily mean that you had to reside in your own home, but that you were present in the country and residing in someone’s home on a regular basis throughout this time. You and your children could even have resided in a shelter.
The ARP also makes it possible for taxpayers in Puerto Rico and the U.S. territories to claim the credit.
How To Get Your Child Tax Credit
You may not have had to do anything at all to receive advance payments of the CTC in 2021. The IRS sent them out automatically to taxpayers who were eligible based on their 2019 or 2020 tax returns. But you're not out of luck if you didn't file a return in those years or if your circumstances have changed since then, such as if you had a child born or adopted in 2021.
If You Filed a Tax Return
It wasn’t necessary for you to file both a 2019 and 2020 tax return to be eligible for the advance CTC payments. Either would do. But you must have claimed the CTC on the return in question.
If You Didn’t File a Tax Return
You can still claim the 2021 credit if you weren’t required to file a tax return in 2019 or 2020, or if you didn’t claim the Child Tax Credit in either of those years. Maybe you didn’t earn enough to surpass the 2020 minimum filing requirements: $12,400 for single filers, $24,800 for married taxpayers filing jointly, or $18,650 for heads of household.
In that case, you had until Nov. 15, 2021, to sign up for the advance payments using the online non-filer signup tool provided by the federal government. You can file a 2021 tax return in 2022 to claim the credit if you failed to sign up by the deadline.
You already may have signed up using the online tool in order to receive a stimulus payment in 2021. You don’t have to do anything more in this case.
The signup tool is available as a phone app as well, and there’s a Spanish version.
Advance CTC Payments
Advance payments were transmitted electronically in 2021 if the IRS had bank account information for you, either the account where you received your refund based on a previous year’s return, or that which you provided when you accessed the signup tool. Otherwise, the agency would have mailed you a paper check to the address it had on file, typically the address given on your last filed tax return.
The “advance” portion of the 2021 Child Tax Credit was one-half of the amount you’d be entitled to claim on your 2021 tax return when you file it in 2022. Payments were made beginning in July 2021 and extended through the end of the year. You can claim the other half when you file your 2021 tax return, or you can claim the entire credit on your return if you didn’t receive advance payments for some reason.
Of course, the IRS won’t know the specifics of your 2021 tax situation until it receives your 2021 tax return in 2022. The amount of your advance CTC was based on the information in an older return. The IRS looked back to 2019 if you didn’t file a tax return in 2020. This fact can present a problem for some taxpayers.
Reconciling Your Advance Payments
Perhaps you had a child dependent in 2020, but your child moved in with their other parent in 2021, so you can no longer claim them on your 2021 return. You would have received advance CTC payments that you weren’t entitled to in this case. Maybe you have no eligible children in 2021, or you only have two qualifying children rather than three. Maybe you earned more than the income cap for your filing status, so the amount of your credit phased out to less than the full half of the credit you received in advance. In any case, you received money from the IRS that you weren’t entitled to.
The IRS requires that you reconcile your advance payments on your 2021 tax return. This means either claiming the second half of the CTC to which you’re entitled, or letting the IRS know that you received money you weren’t qualified to receive for one reason or another.
In the end, you could owe the IRS a repayment when you file your 2021 return. You must claim the amount of your credit as a tax due and owing on that return, not as income. It’s not added to your taxable income where you’d only have to repay a percentage of it according to your tax bracket. It will add to your tax bill or deplete any refund you otherwise would have been entitled to.
But “could owe” are the operative words here. The IRS is offering some taxpayers repayment protection if they received more than what they were ultimately entitled to claim. You might be off the hook for a portion of the amount, or even all of it, based on your 2021 modified adjusted gross income (MAGI). You won’t have to repay any of the advance credit if your 2021 income was:
- $60,000 or less and you’re married filing a joint return or if you’re a qualifying widow(er)
- $50,000 or less if you’re head of household
- $40,000 or less if you’re single or a married taxpayer filing a separate return
The IRS sent Letter 6419 to all recipients of advance payments in January 2022. The notice told recipients exactly how much in payments they received so they can include that information on their 2021 returns.
The Bottom Line
The terms of the 2021 CTC may pose a few stumbling blocks, but it’s still “free money” if you and your children qualify for the full amount you were advanced. The credit is not considered to be income. You don’t have to pay taxes on it, and it won’t disqualify you from receiving other government benefits, such as WIC, TANF, SNAP/Food Stamps, or Supplemental Security income. It won’t affect your unemployment benefits if you’re receiving any, or Medicaid, Section 8 renters’ assistance, or your eligibility for public housing.
Nor were the advance payments reduced for any outstanding tax debt you might have owed to the IRS or another taxing authority, such as your state. But non-federal creditors were able to intercept your payments—provided they had legal standing to do so—such as an unpaid creditor who sued you and got a court order for repayment. And the second half of your credit or your entire credit can be affected if it results in a tax refund in 2022 after you file your 2021 return. The IRS can and will seize refunds for past-due tax debts.
Frequently Asked Questions
How will the Child Tax Credit be paid?
Half the 2021 CTC was paid out in monthly installments from July through December 2021. The other half—or the entire credit if you didn’t receive advance payments for some reason—can be claimed on your 2021 tax return when you file it in 2022.
What do I do if I didn’t receive my child tax credit payments or they were incorrect?
You can claim the full credit on your 2021 tax return when you file it if you did not receive any or all of the advance payments you were entitled to. You can also correct the amount you were due when you provide updated information on that return. You’ll receive more of a credit if you were underpaid, or you may have to repay the IRS, if you were overpaid.
Ask the IRS for a payment trace if your advance payments were issued but you didn’t receive the money, for reasons such as being forwarded to the wrong bank account or mailed to an incorrect address. You can do this by submitting Form 3911, the Taxpayer Statement Regarding Refund, to the IRS.
How do I opt out of the child tax credit?
You had the choice of opting out of the 2021 CTC advance payments if you didn’t want to roll the dice that you would be entitled to the full amount when you file your 2021 tax return, or if you wanted to claim the full 100% of the credit on your 2021 tax return for some other reason. The IRS provided a “CTC Update Portal” online for this purpose, but you would have had to have opted out before the payments ended in December 2021.