Money·5 min read

What Is the Child Tax Credit?

A mother with a child
Design: theSkimm | Photo: iStock
May 6, 2022

Managing your family budget isn’t always easy. But the federal government can help. Meet: the child tax credit. (Psst…in 2022, it may look very different than it did in 2021. Which could change many families’ lives.)

Back up. What is the child tax credit?

It’s a benefit provided by the federal government (and nine states offer their own) to help families tackle the cost of children. Because having and raising kids is expensive.

It was first introduced in 1997 and got a Princess Diaries-level makeover in 2021. But how it works has largely stayed the same: For each child taxpayers have, they can claim a credit. Which gives them a dollar-for-dollar discount on their tax bill. 

(Not to be confused with a tax deduction, which shrinks your bill by reducing your taxable income.)

How’d the child tax credit change in 2021?

Thanks to the American Rescue Plan, the tax credit was (temporarily) revamped in a few key ways to give families extra help through the pandemic:

It was made fully refundable.

Meaning you could claim the full credit even if it was greater than what you owed, i.e. you could get it as a refund. (Non-refundable credits only help to lower the bill if taxes are owed.)

Without the 2021 expansion, only $1,400 of the tax credit is refundable. So if you owe, say, $1,000 in taxes, the child tax credit would get you a $400 refund. If you owe $4,000, you could reduce it by the full $2,000 credit. 

It reached more families.

The update nixed the $25,000 minimum earned income requirement for claiming the credit. Read: Low- or no-income families could get it as a refund, even if they didn’t usually file taxes.

And on the other side of the income bracket, the full 2021 credit was available to all married parents earning up to $150,000 (and single filers earning up to $75,000 and heads of households earning $112,500 or less). For every $1,000 you earned above those limits, the credit decreased by $50 until it got down to the original $2,000 credit. For individuals bringing home $200,000 or more and joint filers making $400,000 or more, it got phased out in the same way — all the way down to $0. 

It also added a year to the age of children who were eligible, bringing it to 17 years old. (PS for the sandwich generation: you could also get a $500 credit for older dependents.)

It paid more…and more often. 

Stimulus 3.0 increased how much you got from the child tax credit — from $2,000 per child ages 16 and younger to $3,000 per child between ages 6 and 17. And $3,600 per child under age 6. Plus, families were able to claim part of the credit as monthly payments for the second half of 2021 and get the rest at tax time.

Here’s the breakdown of how it worked in 2020 vs. 2021:

Design: theSkimm

Did the extra payments help?

Yes. Some families were able to build wealth by saving or paying down debt. And data shows the child tax credit reduced child impoverishment by 30%, keeping 3.7 million children out of poverty through December 2021. 

Most families used the credit to cover essentials like housing, utilities, clothing, and food. Ending the advanced payments — on top of record inflation — has contributed to a rise of families in need and seeking help from food banks.

So we'll keep it like this for 2022?

No. The child tax credit has reverted to its old ways…unless lawmakers act. Right now, they’re just talking about it. And may talk about it more soon, as the Supreme Court looks to be overturning Roe v. Wade. Which has prompted pressure for Republicans to support families after birth.

The expanded 2021 benefits are not likely to return. But advocates are pushing a slimmed-down version. In a New York Times op-ed published this week, former Treasury Secretaries Robert E. Rubin and Jacob J. Lew called on Congress to permanently make the credit fully refundable, as it was in 2021, to help get the money directly to those who need it.

Rubin and Lew also said the 2021 boosted payments would be too costly to keep up. But still recommend a smaller increase. And a long-term investment in making child care more affordable. Because “when we help families make ends meet, children’s outcomes improve, and their futures brighten,” the former treasury secretaries wrote. “That’s not just good for kids; it’s imperative for our overall economy.”

What does all this mean for me?

Don’t expect the same benefits from the child tax credit in 2022. 

And if you haven’t checked in on your budget since you got the last payment in December 2021, it’s time to take a look. (Also because prices have risen a lot since then.) And make extra room as necessary.

Oh, and vote. Lawmakers decide the future of the child tax credit. So if it’s an issue that’s important to you (and your budget), keep it in mind as you listen to candidates gear up for midterm elections.

theSkimm

The expanded child tax credit lifted millions of children out of poverty in 2021. But it’s not coming back in 2022. Adjusting your budget and voting for your values could help.


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