What You Need to Know about Child Tax Credits

Finding qualified babysitters is hard enough as it is, but the COVID-19 pandemic definitely complicated the process, laying bare just how difficult it is to find consistent, adequate child care in the U.S. Data from the Center for American Progress found during the COVID-19 pandemic, the cost of child care that meets the enhanced health requirements has inflated to 47% higher than pre-pandemic rates. As such, the U.S. Treasury Department went so far as to declared the country’s child-care system to be “unworkable.” 

Tax adjustments like the 2021 Child Tax Credit (CTC) and the Child and Dependent Care Tax Credit (CDCTC) are attempts by the government to lighten this burden, especially in light of the inequities COVID-19 has highlighted. Both benefits aim to make quality child care more accessible for American families.

While in light of the COVID-19 pandemic the government expanded the Child Tax Credit drastically in the so-called American Rescue Plan passed in the spring, this was a temporary increase. Congress is currently considering double-barreled infrastructure and social welfare bills which, if passed this autumn, would make these increases permanent (among other things).

Understand how the CTC and CDCTC work, and make sure you claim your full benefits!

The Child Tax Credit

Originally introduced in 1997 as part of the Taxpayer Relief Act, the Child Tax Credit (CTC) helps taxpayers offset the high costs of raising a child. Originally conceived of as a simple $400 nonrefundable tax credit for low- and middle-income families with children under 17, it has since evolved to function as a much larger and more robust tax credit system.

In the 2021 American Rescue Plan, Congress increased the amount of money and widened the pool of eligible families. Congress also for the first time set the CTC payment schedule to occur in monthly disbursements rather than an annual payment at tax season, advertising it as “social security for kids.”

Who Is Eligible For This Program?

Most American families are eligible for the CTC! Qualifying children must be:

• U.S. citizens
• 17 years old or younger (other young dependents such as those 18 years of age, or college students between 18-24 may claim partial nonrefundable benefits)
• Legal dependents of U.S. citizens, U.S. nationals, or U.S. resident aliens

In line with the last criterion, the dependent you are claiming the tax credit for can be your biological child, foster child, adopted child, or someone related to you, such as your nephew, niece, or grandchild.

Currently, Americans may claim the full amount as long as their income does not exceed $112,500 for single parents ($150,000 for married couples). Once your income exceeds these thresholds, the amount you can claim will decline at a rate of 5% of your adjusted gross income. Depending on whether expansions are made permanent this autumn, these income caps may revert to pre-2021 standards next year.

How Can You Claim this Credit?

Eligible taxpayers need not prepare a separate application to claim this benefit. However, it is important to file your taxes according to the guidelines posted by the Internal Revenue Service (IRS) for Schedule 8812 (Form 1040 or 1040A). Once you have submitted the necessary paperwork and tax information, the IRS will determine whether you qualify for this tax credit and automatically enroll you for advance payments.

How Does the American Rescue Plan of 2021 Affect CTC?

The American Rescue Plan of 2021 drastically expanded the existing CTC in the wake of COVID-19’s health and economic effects. Among the noteworthy changes are:

• The credit amount increased from $2,000 to $3,000 (children under the age of six also receive a $600 bonus)
• Income caps for full benefits increased to $112,500 for single parents, and $150,000 for married couples
• Eligible taxpayers now receive credits through monthly advance payments, instead of a lump sum
• CTC now covers low-income families in Puerto Rico and other U.S. territories

These changes, however, are only applicable for the fiscal year 2021. If no further legislation passes before the next fiscal year begins, CTC adjustments will revert to 2020 standards (with some adjustments for inflation).

The Child and Dependent Care Tax Credit

The Child and Dependent Care Tax Credit (CDCTC) is a federal and state tax break that aims to help working citizens specifically cover the cost of care for dependents. For example, if you are working and paying for child care now, you can claim the credit for those expenses on your taxes. You can claim your CDCTC in conjunction with the Child Tax Credit to further offset the out-of-pocket expenses associated with taking care of kids or other dependents.

Much like the CTC, the CDCTC aims to help families reduce financial anxiety and enable them to use their income for other household expenses. It can also help shoulder the burden of additional expenses during the COVID-19 pandemic.

Who Is Eligible for this Program?

Taxpayers must meet some requirements before they can claim this benefit:

• You must have earned income for the year
• Families with an adjusted gross income below $125,000 can now fully benefit from this program—after crossing the $125,000 threshold, it begins to phase out until a cap of $400,000

How Can You Claim this Benefit?

Eligible individuals can claim the credit by attaching Form 2441 to your Form 1040 tax return. Please note, however, that you won’t be able to claim the credit until you file your taxes for 2021 next year. Unlike the CTC, the CDCTC does not pay out in monthly installments. In the meantime, keep records of all childcare expenses, as well as any costs incurred paying for dependents’ needs.

How Does the American Rescue Plan of 2021 Affect the CDCTC?

Similar to the CTC, the American Rescue Plan also expanded the CDCTC. Some revisions that taxpayers should take note of include:

• The maximum amount that a taxpayer can claim increased from $3,000 to $8,000 for one dependent, and from $6,000 to $16,000 for multiple dependents
• The basis for how much credit you’ll receive increased from 35% to 50% of the expense amount
• Exclusions for employer-provided assistance increased from $5,000 to $10,500
• The CDCTC is now fully refundable

How Will Future Bills Change The Child Tax Credit and Other Benefits This Year?

On August 10, 2021, the U.S. Senate passed the Infrastructure Investment and Jobs Act (IIJA). This $1.2 trillion infrastructure package is the first of two pieces of legislation drafted to transform the country’s physical and social welfare infrastructure. While the bulk of social benefits will be addressed in the companion bill, the IIJA includes massive investments in the country’s physical infrastructure. The IIJA will funnel hundreds of billions of dollars into transportation, water infrastructure, clean tech advancements, digital infrastructure, and resilience testing.

The bulk of social welfare infrastructure will be addressed in the twinned reconciliation bill currently working through in Congress. The exact numbers are still under negotiation, but this accompanying bill is expected to shore up the temporary CTC and CDCTC expansions detailed above, as well as provide massive amounts of funding for education, child care, and affordable housing, work toward universal pre-K, and solidify Affordable Care Act (ACA) healthcare marketplace subsidies.

Negotiations are still underway regarding the final forms of both bills, so exact numbers are hard to quantify. However, if they pass this autumn or winter, they will make COVID-era increases to CTC, CDCTC, and ACA benefits permanent, and transform the country’s care systems writ-large in addition to a reinvigorating our physical infrastructure.

Simplify Claiming Your Tax Credits With The Right Tools

Navigating the ins and outs of the tax code can be a headache. But knowing what benefits you may be eligible for—and how to claim them—can also be a lifesaver for your budget! Using the right tools ensures you get every penny owed for your child care expenses.

For instance, you can use tools like a Child Tax Credit calculator or a Child and Dependent Care Tax Credit calculator to accurately deduce your claim amounts. Once you have determined your benefits, you will also need a system to keep tabs on your childcare expenses. Use spreadsheets or keep a folder to store all your receipts.

To simplify tabulating your child care expenses, consider using a platform like Call emmy to book your nannies or babysitters. Call emmy is a babysitter-sourcing app designed to make accessing child care as easy as possible. They have nannies in most major urban areas in the U.S., and with their detailed four-step background check, you need not worry about reliability! Come tax season, you can easily pull up your year’s expenses for CDCTC benefits, as Nanno’s system keeps a full record of your transactions.

Child care is expensive, and hard to navigate. But with the right tools, you can both make sure you get all the care-related tax breaks owed to you, and make sure they go to good use. Sign up for Nanno today!