How Next Year's Credit Could Be Different

Admin 30 Oct 2021

President Biden wants to extend the enhancements made to the 2021 child tax credit – but with some important differences. 

Before getting into the differences between the proposed 2022 child tax credit and the 2021 credit, it's probably best to go over the enhancements for the 2021 credit enacted by the American Rescue Plan Act. It'll be easier to understand the 2022 differences with that knowledge already in hand.

Let's start with the 2020 child tax credit. Back then, the credit was worth $2,000 per child age 16 or younger. It was also phased-out if modified adjusted gross income (AGI) rose above $400,000 on a joint return and above $200,000 on a single or head-of-household return. For some lower-income taxpayers, the credit was partially "refundable" (up to $1,400 per qualifying child) if they had earned income of at least $2,500. (With a refundable credit, the IRS will issue you a refund check for the refundable amount if the credit is worth more than your income tax liability.)

For 2021 (and only 2021), the child tax credit was substantially improved. The credit amount jumped from $2,000 to $3,000 for children six to 17 years old (notice the additional year added to the upper age limit), and to $3,600 for children five years old and younger. The credit was also made fully refundable (so refund checks triggered by the credit can exceed $1,400), and the $2,500 earned income requirement was eliminated.

Parents with higher incomes also have two phase-out schemes to worry about for 2021. The first one applies to the "extra" credit amount added to the 2021 credit (i.e., the additional $1,000 or $1,600 for each child over the $2,000 amount allowed in 2020). For single filers, the extra amount starts to phase-out when modified AGI exceeds $75,000. The phase-out kicks in for head-of-household filers when modified AGI tops $112,500, and when modified AGI surpasses $150,000 for married couples filing a joint return. The second phase-out is the same $200,000/$400,000 one that applied in 2020.

A novel twist was also added for the 2021 child tax credit – advance payments. The IRS is paying half of the total credit amount for 2021 in advance through monthly payments issued from July to December this year (you can opt-out of the payments if you don't want them). You'll claim the remaining half of the credit on your 2021 tax return, which you'll file in 2022.

The amount of each monthly payment is generally based on information pulled from your 2020 tax return. For parents who receive all six payments from July to December, monthly payments can be as high as $250-per-child for kids age six to 17 and $300-per-child for younger children. (Individual payments may be higher if you started receiving monthly payments after July.) You can use Kiplinger's 2021 Child Tax Credit Calculator to see how much your monthly payments should be and how much should be leftover to claim as a credit on your 2021 tax return if you're receiving all six payments.

If the IRS sends you too much money in advance, you might have to pay back any overpayment when you file your 2021 tax return. However, there are "safe harbor" rules that protect lower- and middle-income families from having to pay back some or all their overpayments. If your modified AGI for 2021 is below a certain amount, you won't have to repay any overpayment. Likewise, if your modified AGI is above another amount, you'll have to repay your entire overpayment. But if your income is in the middle, you'll have to run through some calculations to see if any of your overpayments need to be repaid. 

Before getting into the differences between the proposed 2022 child tax credit and the 2021 credit, it's probably best to go over the enhancements for the 2021 credit enacted by the American Rescue Plan Act. It'll be easier to understand the 2022 differences with that knowledge already in hand.

Let's start with the 2020 child tax credit. Back then, the credit was worth $2,000 per child age 16 or younger. It was also phased-out if modified adjusted gross income (AGI) rose above $400,000 on a joint return and above $200,000 on a single or head-of-household return. For some lower-income taxpayers, the credit was partially "refundable" (up to $1,400 per qualifying child) if they had earned income of at least $2,500. (With a refundable credit, the IRS will issue you a refund check for the refundable amount if the credit is worth more than your income tax liability.)

For 2021 (and only 2021), the child tax credit was substantially improved. The credit amount jumped from $2,000 to $3,000 for children six to 17 years old (notice the additional year added to the upper age limit), and to $3,600 for children five years old and younger. The credit was also made fully refundable (so refund checks triggered by the credit can exceed $1,400), and the $2,500 earned income requirement was eliminated.

Parents with higher incomes also have two phase-out schemes to worry about for 2021. The first one applies to the "extra" credit amount added to the 2021 credit (i.e., the additional $1,000 or $1,600 for each child over the $2,000 amount allowed in 2020). For single filers, the extra amount starts to phase-out when modified AGI exceeds $75,000. The phase-out kicks in for head-of-household filers when modified AGI tops $112,500, and when modified AGI surpasses $150,000 for married couples filing a joint return. The second phase-out is the same $200,000/$400,000 one that applied in 2020.

A novel twist was also added for the 2021 child tax credit – advance payments. The IRS is paying half of the total credit amount for 2021 in advance through monthly payments issued from July to December this year (you can opt-out of the payments if you don't want them). You'll claim the remaining half of the credit on your 2021 tax return, which you'll file in 2022.

The amount of each monthly payment is generally based on information pulled from your 2020 tax return. For parents who receive all six payments from July to December, monthly payments can be as high as $250-per-child for kids age six to 17 and $300-per-child for younger children. (Individual payments may be higher if you started receiving monthly payments after July.) You can use Kiplinger's 2021 Child Tax Credit Calculator to see how much your monthly payments should be and how much should be leftover to claim as a credit on your 2021 tax return if you're receiving all six payments.

If the IRS sends you too much money in advance, you might have to pay back any overpayment when you file your 2021 tax return. However, there are "safe harbor" rules that protect lower- and middle-income families from having to pay back some or all their overpayments. If your modified AGI for 2021 is below a certain amount, you won't have to repay any overpayment. Likewise, if your modified AGI is above another amount, you'll have to repay your entire overpayment. But if your income is in the middle, you'll have to run through some calculations to see if any of your overpayments need to be repaid. 

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