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Everything You Need to Know About the Child Tax Credit

By July 16, 2021August 19th, 2021Tax Advice

On July 15, 2021, the IRS began making Child Tax Credit payments to many Americans. These payments are part of the $1.9 trillion American Rescue Plan Act (ARPA) passed in March 2021. They are meant to give much-needed relief to many families suffering due to the current global health crisis. The tax credit will also help small businesses and their owners. 

What is the Child Tax Credit? 

The first Child Tax Credit was created in 1997 as a means to help Americans decrease their tax liability. On a dollar-for-dollar basis, parents can reduce their tax liability for every qualifying dependent child. 

In 2020, the Child Tax Credit (CTC) amounted to $2,000 for every qualifying child. In 2021, ARPA increases the CTC to $3,600 for qualifying children ages 5 and under and $3,000 for qualifying children ages 6-17. In 2021, families can also choose to receive half of their tax credit as advance payments to help with living expenses. 

Who Qualifies for the Child Tax Credit?

In 2020, every qualifying child must:

  • Be a U.S. citizen, resident alien, or national
  • Be under the age of 17 by the end of the tax year
  • Be related to the taxpayer
  • Live with the taxpayer for six months or more of the calendar year
  • Have a Social Security number
  • Be a claimed dependent on the taxpayer’s return

The income thresholds for the taxpayer are $200,000 adjusted gross income (AGI) for single or head of household or $400,000 for married couples filing jointly. For every $1,000 over those thresholds, the tax credit phases out by $50. 

In 2021, the CTC requirements are largely unchanged. However, a child must be the qualifying age by December 31, 2021, to receive the specified credit. The tax credit will begin phasing out at slightly lower income levels: $75,000 AGI for single filers and $112,500 AGI for the head of household filers. It will remain at $400,000 for married couples filing jointly. 

Qualifying for the Additional Child Tax Credit

There is also an Additional Child Tax Credit (ACTC) created to help families whose tax liabilities aren’t high enough to take advantage of the CTC. The ACTC offers these families a tax refund of up to $1,400 if they have three or more qualifying children and an AGI of $2,500 or more for the tax year. 

Requirements for the New Child Care Tax Credit

The Child Care Tax Credit is something completely different. It was created to assist taxpayers with the payment of childcare and dependent care costs. For the 2020 tax year, there is a $1,050 credit available for families with one qualifying dependent and a $2,100 credit for families with two or more dependents. In 2021, this was increased to $4,000 and $8,000 respectively through the American Rescue Plan. 

How the New Tax Changes Impact Employers

As an employer, you want the best for your employees. But challenges like finding adequate child care can increase stress and impact productivity. The Child Tax Credit and other credits available under the ARP ease some of the stress placed on working parents. This ensures that they don’t have to choose between keeping their jobs and staying home. For a small business owner, it’s a winning formula that can only help improve business and bottom-line results. 

Seek Expert Tax and Accounting Assistance

Changes to the tax code are generally complex and followed up by additional guidelines that could muddy the waters even more. When it comes to navigating the complicated business accounting road, we recommend that you have a trusted and knowledgeable partner in your corner. 

Contact Orcutt and Company, located in Milford, Ohio, for all your tax and accounting needs. We serve small business clients throughout the greater Ohio area.