How the Child Tax Credit will affect your tax return

Advance Child Tax Credit payments in 2021 were incredibly helpful for families, particularly with prices going up this year. But how does it affect your tax return during the 2022 tax season? Will you owe or will you get a smaller refund? 

Just like many personal finance questions, the answer to this one is, “it depends.” In this article, discover what to expect IF you received the correct amounts for the advance Child Tax Credit payments. 

2021 changes to the Child Tax Credit 

  • For qualifying children aged 6 to 17 (by Dec. 31, 2021), the tax credit was increased from $2,000 to $3,000.
  • For qualifying children under 6, the tax credit was increased to $3,600. 
  • And previously, 17-year-olds did not qualify for the Child Tax Credit, but for 2021 they do qualify.

The increased amount is fully available for families with income up to $150,000 if filing married filing jointly, up to $112,500 if filing head of household, and up to $75,000 if filing single. Once above those incomes, the credit starts to phase out, meaning the credit gets reduced as income increases).

If you didn’t opt out of monthly advance Child Tax Credit payments, the total amount of the payments is half of the total credit you are eligible to receive for the year. That “half” was spread out over July – December 2021. 

So for one qualifying 7-year-old, that means a $300 payment each month. 

For most taxpayers, your 2020 tax return income is used to determine if your family qualifies for this tax credit. 

The advance payments do NOT count as taxable income. 

And finally, the Child Tax Credit and the advance payments are fully refundable. This means if you don’t have taxable income, you may still qualify to get the full credit. 

How Changes to the Child Tax Credit Impact Tax Returns

Even if you received the “correct” amount of Advance Child Tax Credit Payments, there will be changes to your 2021 tax return. 

When you file your 2021 tax return, make sure you paid the right amount in taxes and received the right amount of the advance Child Tax Credit payments. 

If you think you may have received the wrong amount of advance Child Tax Credit payments, please take a look at this article here. 

Taxes can be complicated, but let’s do the math together. 

For most people, the changes will look something like this:

IF you have one qualifying child (aged 6 to 17), IF you received the full amount of advance payments, and IF you should have received the full amount: In total, you received $1,500 of the Child Tax Credit in advance. This means there is $1,500 left of the Child Tax Credit to be received. In previous years the total Child Tax Credit for one qualifying child when filing your tax return was $2,000. You’ll notice a $500 difference. 

Assuming there are no other differences from the 2020 to the 2021 tax returns (same income, same withholding, same filing status, etc…), this means most will see a little less than a $500 reduction in their refund. If your typical tax refund is less than $500, you may possibly owe money when you file your tax return. 

Note: I say “a little less than $500” because the standard deduction goes up slightly from year to year and some other factors in tax returns adjust slightly each year. So about a $500 reduction for each qualifying child on the tax return. 

Example: Someone with three qualifying children (aged 6 to 17) and usually gets about an $8,000 refund (and who gets the full Child Tax Credit) should expect about a $1,500 lower refund, so about a $6,500 refund instead of $8,000. 

That is a big change. If you have plans for that money, it can make a big difference. 

For others, the changes could look like this:

For tax year 2020, if you didn’t get the full $2,000 credit available from the Child Tax Credit and additional Child Tax Credit, you could see an increase in the amount of Child Tax Credit you receive when you file your tax return and potentially higher refunds. In your 2020 tax return, add the amount you have for Child Tax Credit and the amount you have for additional Child Tax Credit. If this totals less than $1,500 per qualifying child, you can expect a higher total Child Tax Credit for 2021, assuming you are claiming the same number of qualifying children.

Please remember that, given the same conditions, your total credit received will be more, not less. 

If receiving the maximum credit, adding the credit received when filing to the advance payments comes out to at least $1,000 higher ($1,600 higher for five and younger) than 2020.

If your income is above the incomes listed above (when the phase-out starts), the math is more complicated. However, if you accurately receive some advance Child Tax Credit, it is important to remember it may result in a lower Child Tax Credit received through your tax filing.

Please be prepared if you are one of the taxpayers who may get smaller refunds (or even owing) when filing your tax returns. 

Planning ahead and being prepared is a good way to avoid financial problems or at least help in keeping them as small problems rather than big ones. But also please realize that if you are able to use the child and dependent care credit in 2021, that may offset some or all of the change in your 2021 tax return, since the 2021 child and dependent care credit has big changes too. 

Oh, one more thing. In January 2022, the IRS will send you a letter (Letter 6419) about the advance Child Tax Credit payments. Keep this letter for your records and for preparing your tax return. You can read more about Letter 6419 here. 

Read more about the Child Tax Credit

  1. 2021 Changes to Child and Dependent Care Tax Credit
  2. What should I do if my Advance Child Tax Credit Payments were Wrong?
  3. Tax Tips: Someone else received my dependent’s Child Tax Credit
  4. What to do when the IRS sends you Letter 6419
  5. How the Child Tax Credit will affect your tax return
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