The child tax credit (CTC) is a federal tax credit that was created in 1997 by the Taxpayer Relief Act. The credit has been modified in various ways over the decades since its debut, but changes made in 2021 by the American Rescue Plan Act (ARPA) are the first to introduce advance payments for the credit. Here, an Indianapolis tax attorney explains how the child tax credit impacts Indiana taxpayers, what families need to know about the CTC, and what actions need to be taken, if any, as a result of the changes in 2021.
Understanding How the Child Tax Credit Impacts Indiana Taxpayers
The child tax credit directly reduces the amount of federal taxes some families owe based on several factors, including the ages of eligible children and the family’s income. Understanding how the child tax credit impacts Indiana taxpayers is important because the credit, and particularly the advance payment of a portion of the credit, will affect the bottom line regarding federal income taxes owed or the amount due to you as a tax refund when taxes are filed with the Internal Revenue Service (IRS).
What Is the Federal Child Tax Credit?
The CTC is a federal tax benefit for American taxpayers who are raising children. When it was introduced in 1997, eligible taxpayers received up to $400 in relief per child. The amount was raised to $500 in 1998, a rate at which the credit remained until the American Taxpayer Relief Act of 2012 raised the cap of the benefit to $1,000 per dependent child. In 2018, the child tax credit maximum per child increased to $2,000 as a result of the Tax Cuts and Jobs Act of 2017.
While a handful of US states do have state-level child tax credits, Indiana does not. The Hoosier State does provide some Indiana tax credits, however, including a state earned income credit and credits for adoption, college savings, and college spending.
Changes in How the Child Tax Credit Impacts Indiana Taxpayers
The American Rescue Plan Act, in response to the COVID-19 pandemic, increased the tax credit available under the CTC from $2,000 to $3,600 for each child under six. The top credit was increased from $2,000 to $3,000 for children six and older and the maximum age to qualify was raised from 16 to 17. These changes were made only for tax year 2021, but President Biden has proposed extension of the credits in the American Families Plan.
The maximum allowable credit is due to families with eligible children and an income of $150,000 or less for those married and filing jointly or $112,000 for single filers or heads of household. Married couples who file jointly with income of less than $400,000 per year or heads of household/single filers with income of less than $200,000 are eligible to receive a reduced credit.
Advance payment of the child tax credit is potentially the most significant change implemented by the ARPA. The amount of credit due under the CTC was calculated based on a taxpayer’s earnings and dependent children as listed in the most recent tax filing, with half of the credit paid between July and December 2021 and the remaining half due at the time 2021 federal income taxes are filed.
What Indiana Families Should Know and Do about the CTC
It is possible, especially if you have experienced a change in income or dependents, that the advance payment of these credits could result in an overpayment you would owe when calculating your 2021 taxes. An opportunity to opt out of the advance payment was provided for individuals or families who did not wish to risk that result when filing in 2022.
If you wished to receive the advance payments and you filed taxes in the past, you should have begun receiving the credit on July 15, 2021.Non-filer sign-up was available on the IRS website until November 15, 2021 for those who did not previously have income at a level that required them to file taxes.
If you are unsure how the federal child tax credit impacts your family and tax liability, you can use a management portal provided by the IRS to review and manage payments, bank information for deposits, your mailing address, and more.
Advance Child Tax Credit Problems for Divorced Parents
Although intended to help, the mechanics of the child tax credit have wreaked havoc for many. The advance CTC payments made during 2021 were made to the parent who applied the child tax credit on their 2020 tax return. For parents who alternate the CTC, the advance payments went to the wrong parent. This has created problems like these:
- The parent entitled to claim the CTC for 2021 must seek repayment from the former spouse who received any advance payments. In some cases, litigation is necessary to obtain repayment.
- The parent entitled to the advance child tax credit payments in 2021 could seek to have the other parent held in contempt for failing to opt out of the advance payments, thus diverting the payments to the wrong parent for the 2021 tax year.
Even if divorced parents are able to navigate problems like these, many may be surprised to learn that they have a tax liability for 2021 as a result of receiving advance payments. And parents who neither opted out nor received advance payments will need to determine whether they were victims of child tax credit scams, which abounded in 2021.
An Indiana tax lawyer can help you navigate these and other advance CTC problems suffered by divorced and non-divorced parents alike.
Discuss Your Tax Situation with an Indiana Tax Lawyer
Understanding how the child tax credit impacts Indiana taxpayers before filing your taxes for the 2021 tax year in 2022—and any time tax laws change—is important to ensure you don’t find yourself with an unmanageable tax bill. If you need assistance in federal and state tax matters in Indiana, Indiana tax lawyer Julie A. Camden at Camden & Meridew, P.C. is ready to help. Reach out to Julie before a problem arises by calling 317-770-0000 or completing our online contact form.