Families might see their tax bill increase for 2022. Changes in the Child Tax Credit will affect all income levels.
First enacted in 1997, the Child Tax Credit has helped American families weather the cost of raising children. The amount has been changed several times. But this time, it’s going down. What is the new credit for the tax year 2022, and how does it affect families?
American Rescue Plan Expands Credit
The shutdown hit families hard. Many industries, like restaurants, had major layoffs. That left many scrambling to make ends meet. Those with children were especially hurt.The American Rescue Plan, a stimulus law, sought to help families by expanding the Child Tax Credit. The credit increased for 2021.
The Child Tax Credit was raised from$2,000 to $3,600 per child for children under the age of six who qualified. In addition, it was increased to $3,000 for qualifying children under 17. In the past, 17-year-olds were not eligible for the credit. Children 16 and under were the only ones qualified.
Some Adjusted Gross Income Levels Had Lowered Tax Credit
The credit began to be reduced to $2,000 per child, depending on adjusted gross income (AGI). The individuals who received the lower credit had:- AGI of $150,000 over for filing jointly; or
- AGI of $112,500 if filing as head of household; or
- AGI of $75,000 if a single filer.
Child Tax Credit Payments Made in Advance
Half of the estimated Child Tax Credit was paid in advance to eligible parents. The payments were required by law to be paid before Dec. 31, 2021. This occurred from July to December. And it allowed families to take advantage of the tax credit as needed.The caveat to this was if that at the end of the year the family was paid more than they would receive back through traditional filing, they would have to pay the money back to the government.
Removed the Earnings Floor
In the past, there was an earnings floor of $2,500. No taxpayer who earned under $2,500 could receive the Child Tax Credit. The American Rescue Plan eliminated this qualification.The Child Tax Credit also became fully refundable to those families who lived in the United States for more than six months in 2021.
Child Tax Credit Refundable in 2021
Before 2021, the Child Tax Credit wasn’t refundable. In other words, the credit couldn’t be used to increase the tax refund. It also couldn’t be used to create a tax refund when you wouldn’t have already received one. In other words, a taxpayer’s savings cannot exceed the tax owed.The American Rescue Plan changed that qualification. The credit became refundable regardless of if you owed taxes or not.
Puerto Rico and US Territories Benefited
The Child Tax Credit was extended permanently to Puerto Rico and U.S. territories. This was the first time families residing in Puerto Rico and the U.S. territories received assistance.2021 Child Tax Credit Expansions Gone
The American Rescue Plan stimulus was in effect for only one year. The Child Tax Credit is now reverting to the 2020 law. That means for the tax year 2022, the age of a dependent is back to under 17. The tax credit reduces to $2,000 per child, 16 years old or younger. To be a dependent, the child must live with you for at least six months and be a relative.The child must also be a citizen, national or resident alien, and have a Social Security number.
Adjusted Gross Income Increased
The Child Tax Credit begins to diminish for some Americans. This affects those who file jointly and whose AGI exceeds $400,000. An individual or head of the household can’t exceed $200,000.Once the AGI of $400,000 or $200,000 is reached, the credit amount is reduced. The credit is reduced by $50 for each $1,000 over the threshold. That’s $50 less than the base $2,000 credit. So it’s easy for someone in that income range to quickly lose the entire credit.
Child Tax Credit Not Refundable for 2022
Although the Child Tax Credit is no longer refundable, $1,500 of the credit is refundable for some lower-income people with children.Earnings Floor Reinstated
Once more, the credit will require an earnings floor threshold. Even though there’s a partial refund available to lower-income families, they must earn at least $2,500 to qualify.Child and Dependent Care Credit
The Child and Dependent Care Credit is also changing. It is for those qualifying individuals who paid for childcare expenses. The expenses are for the care of children or dependents of those who are working or actively looking for a job.In 2021, the credit was up to $4,000 for a qualifying individual and $8,000 for two or more qualifying persons. It was also refundable.
But in the tax year 2022, the credit is reduced to no more than $3,000 for a qualified individual and $6,000 for two or more people.
The Child Tax Credit Is Reduced for 2022
Americans might have been comfortable with the 2021 Child Tax Credit, but that will all change. The credit is reduced for the tax year 2022 by 44.4 percent per child for qualified families.The credit also changes who is eligible. Only children 16 years or younger are now eligible in 2022, as opposed to 17-year-olds being included for 2021.
Although it’s lower than in 2021, it will remain the same as it was in 2020.
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