IRS Updates Child Tax Credit Guidance

The Biden administration expanded the Child Tax Credit as part of the American Rescue Plan last year by offering families advance monthly payments of $250 to $300 per qualified child to reduce the rate of childhood poverty. For the 2021 tax year, the Child Tax Credit increased from $2,000 per qualifying child, to $3,600 for children aged five and under, and $3,000 for children ages six through 17. The administration had hoped to extend the expanded tax credits this year as part of the Build Back Better Act, but that massive legislative package has been stalled.

With the Build Back Better Act stalled, The Internal Revenue Service has updated its FAQ fact sheet on the Child Tax Credit and Advance Child Tax Credit. There is new information on eligibility and how to calculate the amount of the credits and payments. The IRS is advising families and tax advisors to ignore an earlier publication, Publication 972, and to refer to Schedule 8812 (Form 1040) instead. Many taxpayers are also discovering that they are receiving less of a tax refund this year than they had anticipated since half the usual amount of the Child Tax Credit was sent out in advance last year along with the expanded portion. Taxpayers and tax professionals are currently dealing with calculating how much can still be claimed, and in some cases, how much is owed to the government if there was too much of an overpayment.

Child and Dependent Care Credit

Separately, the IRS also made a push to highlight a related tax credit, the Child and Dependent Care Credit, which also expanded for 2021. Depending on their income, taxpayers can get a credit worth 50% of their qualifying child care expenses. For the tax year 2021, the maximum eligible expense for this credit is $8,000 for one qualifying person and $16,000 for two or more. However, taxpayers with an adjusted gross income of more than $438,000 are not eligible for this credit. For the Child and Dependent Care Credit, the IRS defines a qualifying person as:

  • A taxpayer’s dependent who is 12 or younger (no age limit if incapacitated) when the care is provided
  • A taxpayer’s spouse who is physically or mentally unable to care for themselves and has lived with the taxpayer for more than half the year
  • Someone who is physically or mentally unable to take care of themselves and lives with the taxpayer for six months and is either: 1. The taxpayer’s dependent or 2. Would have been the taxpayer’s dependent except for one of the following:
    • The qualifying person received a gross income of $4,300 or more
    • The qualifying person filed a joint return; or the taxpayer or spouse, if filing jointly, could be claimed as a dependent on someone else’s return.

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