760 / Who qualifies for the child tax credit?

Eligible taxpayers were not required to take any action to receive the advance payments on the 15th of every month. Monthly payments totaled up to $300 for each child under age six and up to $250 per month for each child aged six and older. Depending upon the information the IRS had on file, payments were made via direct deposit, paper checks or debit cards. The advance payments totaled up to 50% of the amount the taxpayer was eligible to receive based on 2020 filing information. According to IRS guidance, taxpayers who were not otherwise required to file tax returns for 2020 could file simplified 2020 returns to receive monthly advance payments of the expanded child tax credit. Those taxpayers could file Form 1040, Form 1040-SR or Form 1040-NR to provide Social Security numbers, addresses and other information. Those taxpayers were required to write “Rev. Proc. 2021-24” on the forms. Taxpayers who had $0 in adjusted gross income (AGI) reported $1 in AGI in order to file electronically and qualify for advance payments.¹

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Planning Point: The IRS Child Tax Credit Update Portal provides information about the client’s eligibility for advance child tax credit payments and information about how those payments are made. Clients can use this portal to set up direct deposit payments, change their bank account information and provide information about any changes to their income. Taxpayers who do not elect direct deposit will receive a paper check. Clients can also use the portal to elect to stop receiving advance payments and instead claim their entire child tax credit in a lump sum when they file their 2021 tax returns. Married couples who elect to unenroll must each separately unenroll. If only one spouse enrolls, the other will continue to receive 50% of the otherwise available monthly child tax credit. Clients may wish to unenroll if they do not anticipate qualifying for the payment based on their 2021 income or if they would prefer to receive a larger tax refund.

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With the exception of 2021, the child tax credit is available for each “qualifying child” (defined below) of eligible taxpayers who meet certain income requirements. The child tax credit is $1,000 ($2,000 for tax years beginning after 2017 and before 2026, see below).²

Additional Rules for Tax Years Beginning After 2017 and Before 2026

An expanded $2,000 child tax credit is available for tax years beginning after 2017 and before 2026 ($1,400 of this per-child credit is refundable). The taxpayer must include the Social Security number for each child for which the refundable portion of the child tax credit is claimed.³ The $1,400 refundable is indexed for inflation and rounded to the next multiple of $100 ($1,700 for 2024, see Editor’s Note, above).⁴

A new family tax credit was created to allow for a $500 nonrefundable credit for dependent parents and other non-child dependents (the requirement for furnishing a Social Security number does not apply to this family tax credit).⁵

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Planning Point: For purposes of the definition of “dependent” for this provision, the exemption amount which was otherwise reduced to zero for 2018-2025) will be treated as though it remained at the pre-reform $4,150 amount in 2018, $4,200 in 2019, $4,300 in 2020-2021, $4,400 in 2022, $4,700 in 2023, $5,000 in 2024 and $5,100 in 2025.⁶

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The credit will phase out for taxpayers with AGI of $400,000 (joint returns) or $200,000 (all other filers). The phase out amounts are not indexed for inflation.⁷ As is the case with the suspension of the personal exemption, these provisions are set to expire after 2025.

The term qualifying child means a “qualifying child” of the taxpayer (as defined under IRC Section 152(c) – see below) who has not attained the age of seventeen.⁸

“Qualifying child” means, with respect to any taxpayer for any taxable year, an individual:

(1)  who is the taxpayer’s “child” (see below) or a descendant of such a child, or the taxpayer’s brother, sister, stepbrother, or stepsister or a descendant of any such relative;

(2)  who has the same principal place of abode as the taxpayer for more than one-half of the taxable year; and

(3)      who has not provided over one-half of such individual’s own support for the calendar year in which the taxpayer’s taxable year begins.⁹

Additionally, a qualifying child must be either a citizen or a resident of the United States.¹⁰

The term “child” means an individual who is: (1) a son, daughter, stepson, or stepdaughter of the taxpayer; or (2) an “eligible foster child” of the taxpayer.¹¹ An “eligible foster child” means an individual who is placed with the taxpayer by an authorized placement agency or by judgment decree, or other order of any court of competent jurisdiction.¹² Any adopted children of the taxpayer are treated the same as natural born children.¹³

The amount of the credit is reduced for taxpayers whose modified adjusted gross income (MAGI) exceeds certain levels. A taxpayer’s MAGI is his adjusted gross income without regard to the exclusions for income derived from certain foreign sources or sources within United States possessions. Prior to 2018, the credit amount was reduced by $50 for every $1000, or fraction thereof, by which the taxpayer’s MAGI, exceeds the following threshold amounts: $110,000 for married taxpayers filing jointly, $75,000 for unmarried individuals, and $55,000 for married taxpayers filing separately.¹⁴

Prior to 2018, the child tax credit was refundable to the extent of 15 percent of the taxpayer’s earned income in excess of $3,000 (previously, this amount was $10,000; see below).¹⁵ For example, if the taxpayer’s earned income is $16,000, the excess amount would be $13,000 ($16,000 – $3,000 = $13,000), and the taxpayer’s refundable credit for one qualifying child would be $1,950 ($13,000 × 15 percent = $1,950). For families with three or more qualifying children, the credit was refundable to the extent that the taxpayer’s Social Security taxes exceeded the taxpayer’s earned income credit if that amount was greater than the refundable credit based on the taxpayer’s earned income in excess of $3,000.¹⁶ The previously applicable $10,000 income floor was indexed for inflation. ARRA 2009 reduced the dollar amount to $3,000 for 2009 through 2012.¹⁷ ATRA extended the $3,000 floor amount through 2017, and the PATH Act made this provision permanent.¹⁸ See above for the rules governing the credit from 2018-2026. (Prior to 2001, the child tax credit was refundable only for individuals with three or more qualifying children.)¹⁹

The nonrefundable child tax credit can be claimed against the individual’s regular income tax and alternative minimum tax (see Q 758). The nonrefundable child tax credit cannot exceed the excess of (i) the sum of the taxpayer’s regular tax plus the alternative minimum tax over (ii) the sum of the taxpayer’s nonrefundable personal credits (other than the child tax credit, adoption credit, and saver’s credit) and the foreign tax credit for the taxable year.²⁰ For tax years beginning after 2001, the refundable child tax credit need not be reduced by the amount of the taxpayer’s alternative minimum tax.²¹ The nonrefundable credit must be reduced by the amount of the refundable credit.²²

Some additional restrictions applying to the child tax credit include: (1) an individual’s tax return must identify the name and taxpayer identification number (Social Security number) of the child for whom the credit is claimed; and (2) the credit may be claimed only for a full taxable year, unless the taxable year is cut short by the death of the taxpayer.²³ For purposes of applying a uniform method of determining when a child attains a specific age, the Service has ruled that a child attains a given age on the anniversary of the date that the child was born (e.g., a child born on January 1, 1987, attains the age of 17 on January 1, 2004).²⁴ The IRS stated that it would apply Revenue Ruling 2003-72 retroactively and would notify those taxpayers entitled to a refund for 2002 as a result of Revenue Ruling 2003-72.²⁵