How Will the Child Tax Credit Affect My 2021 Tax Return?

As 2021 comes to a close, many may be wondering how the Child Tax Credit will affect 2021 tax returns. It’s almost time to gather receipts together and get in touch with your trusted tax accountant. So, let’s look at what you can expect going into 2022.

The Child Tax Credit (CTC) payouts began in July 2021 in monthly installments. They finish up this month on December 15. These are early payments for singles and families with qualifying children of the CTC. Instead of waiting until their return, qualifying parents were sent monthly installments of their allotments to help out during the pandemic recovery.

But what happens when you go to file your taxes?

First, it’s important to realize that the tax credit itself is not considered income. So, there are no adverse consequences to accepting the payments. These payouts are based on taxes you would most likely have received in a refund with your income tax return if you typically receive one.

It’s also important to realize that your CTC payments are based on your 2020 income tax return filed in 2021. If your income, family status, or child(ren) changed in 2021, it could affect what happens with the payouts and your tax filing.

For example, let’s imagine you had a job that paid less than $74,000 and you qualified for the single CTC in 2020. Your payout would be based on that scenario. But what if you got a different job that paid $76,500 in 2021 (yay, you!) and that canceled your qualification for the CTC?

In that situation, you would have to pay those installment payments back when you file your taxes. Most families who qualify for the CTC would be eligible for a credit of $2500 to $3000 on their taxable income. So, if you were somehow disqualified in 2021 you won’t get that credit when you file.

Can I Opt-Out?

Since we’re at the end of the year, opting out of those payments as an option is off the table. You’ll simply need to discuss your tax payment with your accountant. If you typically get a tax refund at the end of the year, the CTC payouts will definitely put a damper on those expectations.

But you can always update your current information in the CTC portal to make sure the IRS is working with the most current information.

What If I’m Self-Employed?

If you own a business or are self-employed (which includes contractors and freelancers who use a 1099 for income payments), you can take advantage of the CTC. It may be more difficult to determine what your annual income will be since it fluctuates through the year.

But you can update any information you need through the CTC portal. The payments do not count as income so you will not be penalized for receiving them.

The qualifying adjusted gross income thresholds for the CTC are:

  • Single: under $75,000.
  • Head of household: $112,500.
  • Married filing jointly: $150,000

After that, there are additional factors to consider that may disqualify you from the CTC.

The good news is the IRS will send out a letter in January 2022 to show you exactly how much you received in CTC payments that you can show your accountant when you file your taxes. And you only would have received half of your expected annual tax credit, meaning the most you should receive is around $1500 from July to December. That should leave some funds to offset whatever amounts you may owe at the end of the year.