The pandemic has been a financial burden for many people in the country, and in 2021, American families received a helping hand in the form of a monthly payment of their 2021 child tax credit. This stimulus is different from the lump sum payments Americans received in 2020 and early 2021 as it is an advance of the Child Tax Credit that families will receive on their 2021 income taxes.

While this payment is a welcome help to families that are struggling to cover food and basic expenses, it’s also confusing to some who believe it will negatively impact their 2021 taxes and that they will have to pay the money back when tax time comes.

This blog will address these frequently asked questions about the Child Tax Credit and the advance payments made during 2021.

What Is the Child Tax Credit?

A credit is a direct reduction of an individual’s tax liability, and the Child Tax Credit is meant to reduce the liability of families in proportion to the number of qualifying dependents they have in their household. When combined with the Earned Income Credit (EIC), the two credits combine to greatly reduce or eliminate tax liability to many families.

How Is the Child Tax Credit Different for 2021?
As a part of the American Rescue Plan, the Child Tax Credit went through some significant, albeit temporary, changes. The credit has significantly changed in three major ways for the 2021 tax year:

The age of a qualifying dependent was increased to 17.
The amount of the credit increased to $3,000 for a child under 18 or $3,600 for children younger than 6.
The credit was made fully refundable, which means if the credit exceeds the amount of taxes owed, the excess is refunded back to the taxpayer.

How Will the Child Tax Credit Affect My 2021 Taxes?
Most taxpayers will not notice a difference. The amount of the credit was increased in 2021. Unless your income increased significantly in 2021, the amount of credit left to claim on your 2021 return should be close to what it would normally be.

Do I Have To Pay Back the Child Tax Credit?
No. Since the tax credit is refundable in excess of your tax liability, the money is yours to keep and out to good use.

Is the Child Tax Credit Taxable?
Like the stimulus payments, your Child Tax Credits are not considered taxable income and therefore not taxable on your 2021 tax return.

How Will I Know How Much I have Received in Advance Payments?
The IRS has you covered. In January 2022, all taxpayers will receive Letter 6419 reporting the amount of all advance payments received by them in 2021. Taxpayers will need to include this on their 2021 income tax return. This is especially valuable if your family elected to opt out of any payments during 2021.

Don’t Count on Payments Continuing After 2021
Six months of advance Child Tax Credit payments have had a huge impact on families that were struggling during the pandemic in 2021 given higher inflation, higher energy bills, and a higher cost of food, but it’s uncertain if these payments will continue for 2022 taxes.

Plan Ahead for 2022

Rubino understands that some people need extra help understanding and paying their income taxes. Tax planning is more than simply reviewing your prior tax years, and assets-it is a comprehensive, proactive tax plan that manages your income and your taxes so that your liability is minimal and your assets are maximized. We focus on your goals, and we examine the business, personal, and tax factors that affect them. We work with you to sort through complex issues, so your taxes are never a worry. We check your finances to see if you are eligible for tax breaks and incentives such as the 2021 Child Tax Credit payments and can explain what they mean to your individual tax situation.

For more information about the credit, the impact of advance child tax credit payments in 2021, or if you have any issues come tax time, visit the IRS website or reach out to your Rubino tax professional.