The first letter many parents would have received this year is the one that is going to make them think twice about their childcare plans during the summer holidays. It’s the dreaded demand from HMRC for the Child Tax Credit overpayment.
It’s the time when many families might be looking to apply for the Child Tax Credit. With the government pushing their ‘Childcare’ policy and families increasingly feeling the pinch, the Child Tax Credit is an excellent way to ease the pressure. But the rules are complex and many families could be losing out.
The government has introduced a range of new tax changes which will affect a lot of people. One of these changes is the amount of child tax credit you will be eligible for. The government has recently cut the tax credit for the second child and the full child tax credit will only be available for the first two children.
When it comes to deciding the number of children you have, the tax credit is not the only thing that should be taken into consideration. Unfortunately, the tax credit is often not enough to cover the cost of raising children. Nevertheless, you should know what types of childcare vouchers are available, how you can request a payment adjustment, and how to make sure you have taken the tax credit decision into account. Use our calculator to estimate your Child Tax Credit.
What’s Child Tax Credit?
The child tax credit is a tax credit that is available to all families with children. However, not all parents qualify for this tax credit. It’s important to point out that this refundable tax credit is available to taxpayers who have a qualifying child, defined as an individual under the age of 17.
It was created as part of the Taxpayer Relief Act of 1997. Note that it was originally called the “dependent care” deduction, but it was renamed in 2001. The purpose behind this act was to provide tax relief for families with children by helping them with the cost of raising children. It can reduce your taxes owed to zero and can provide you with additional refunds.
2020 taxes
The child tax credit can be worth up to $2,000 per qualifying child and it is refundable. Actually, the amount of the credit depends on your annual income and the number of children you have. The amount you qualify for increases as your yearly income goes up, but it starts to phase out when your adjusted gross income reaches $200,000 (or $400,000 if married filing jointly).
2021 taxes
In 2021, the American Rescue Plan raised the max annual child tax credit to $3,000/child (for children in the 6-17 age range). It was increased to $3,600/child (for kids under the age of 6). What’s more, the credit was completely refundable and parents could receive it in advance payments every month, meaning no taxes have to be owed in order to get this type of financial assistance. Depending on the filing status, the yearly income thresholds are as follows:
- Jointly return – 150,000 dollars
- Return for the head of household – 112,500 dollars
- Single return – 75,000 dollars
2022 taxes
While there were some inflation adjustments after 2021, the rules in place for 2020 are going to take effect again. Since the legislation — which was designed with the goal of extending the credit — wasn’t passed, the child tax credit will decrease to 2,000 dollars. The good news is that a portion of the annual credit can be refunded when it comes to the tax year 2022.
Child Tax Credit Calculator: How Does It Work?
If you want to calculate the child tax credit, there will be four steps to take.
Step 1
First of all, you will have to file a tax return. As a qualifying taxpayer, you will be able to receive funds (your child tax credit) only if you are eligible for this. Remember that the dependent child(en) will also be required to fulfill the tax law requirements to claim the credit.
Step 2
Next, you need to consider your AGI (adjusted gross income). Check your tax form to find this value. Once your annual income has reached a certain amount, the tax credit will begin phasing out. Adjusted gross income is the amount of gross income that is left after subtracting certain deductions from gross income.
In order to calculate adjusted gross income, you need to know what your gross income is. Gross income includes all types of wages, salaries, tips, and commissions. It also includes self-employment earnings, interest and dividend payments, capital gains from the sale of assets (such as stocks), and other types of unearned income.
Step 3
At this stage, you should know how many dependents are eligible and what their ages are. You will actually need to determine the number of kids who have not turned 18 yet. Older persons aren’t eligible for this kind of credit.
Step 4
The last step involves determining the filing status of the person who claims the Child Tax Credit. As stated earlier, this can dramatically affect the amount of credit. There are three options:
- Jointly return (it features the greatest credit)
- Return for the head of household, and
- Single return (it implies the lowest value of credit).
Now that you know all the facts required, you can easily calculate your tax credit with our calculator. To help you understand how it works, we will take an example. Let’s say your annual adjusted gross income is $1,000. We will also assume that you have three children.
- 1st Child – Age 5: Child Tax Credit = $3,600
- 2nd Child – Age 8: Child Tax Credit = $3,000
- 3rd Child – Age 17: Child Tax Credit = $3,000
The total child tax credit will be the sum of all the credits. So, in our example, it will be $9,600 (3,000 + 3,000 + 3,000). This means your estimated credit would be $9,600.
However, keep in mind that this applies to the 2021 Child Tax Credit. The child tax credit of $3,600 is about to revert to 2,000 dollars per dependent. So, if you have 3 children under age 18, you will actually receive 6,000 dollars (3 * 2,000). That is $3,600 less than last year! Stay up to date with the new regulations for the child tax credit.