April 29, 2022

Clearing Up Child Tax Credit Confusion

From the Walls Street Journal, WEDNESDAY, MARCH 30, 2022

The expanded federal child tax credit has put more money in families’ pockets, but it also has created confusion as Americans prepare their taxes. Wall Street Journal tax reporter Richard Rubin joins WSJ Your Money Briefing host J.R. Whalen to discuss how people should approach the child tax credit to avoid making errors on their returns.


This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.

J.R. Whalen: Last year Congress expanded the child tax credit as households were recovering from the pandemic. That’s the good news, as it put some much needed cash in the pockets of many parents. The bad news is, that now it’s causing a lot of confusion as people sit down and prepare their taxes. I’m J.R. Whalen from the Wall Street Journal. WSJ tax reporter, Richard Rubin has been following all of this and he’s here to help us better understand the fine print. Rich, thanks so much for being with us.

Richard Rubin: Oh, thanks for having me.

J.R. Whalen: So Rich, let’s start big picture for a moment. What exactly is the child tax credit and who’s eligible to receive it?

Richard Rubin: So the child tax credit is a break that most households with children get for just having those children. It’s a set amount, a reduction of your total tax bill. So it’s not a deduction, which reduces the amount of income subject to tax, it’s a credit, which means that reduces the total amount of tax you owe by whatever amount you qualify for. Now, the most common situation of course, is parents living with their own children. But this can also apply too in other situations for people who have custody of children… for relatives who aren’t their children and other situations as well. And there are income limits with the child tax credit, so they vary by year. And we can talk about some of the changes that Congress has put into place. But at the very high end, once individual income hits $200,000 or married couple’s income hits $400,000, the entire credit starts shrinking. So very, very wealthy people can’t get the child tax credit, but for the bulk of households it’s available.

J.R. Whalen: Yeah. There have been some changes that Congress has made. They expanded these tax credits in 2017, but what changed last year?

Richard Rubin: Yeah. So Congress made some changes for 2021 only. So those aren’t in effect for tax year 2022, but for 21, the returns that people are filing right now as we head up to this mid-April deadline. And they did a few things. Number one, they increased the size of the credit. So instead of $2000 per child, it’s up to $3000 per child or $3,600 per child for those under age six at the end of last year. Now, those higher amounts start phasing out once income hits $75,000 for individuals and $150,000 for married couples. You can still get the base $2000 credit if you’re in between that and the 200, $400,000 level. They also made 17-year-olds eligible, which they weren’t before. They all also made the credit fully refundable. So that means that households that are very low-income households, that might not otherwise pay income taxes, can get the full amount of the credit. It’s essentially like a cash grant, you can think of it as, not a reduction in your taxes. And then the other big change is, they made part of the credit payable in advance. So millions of people got these monthly checks starting in July of 2021 that added up to about half of the credit that they were eligible for over the course of the whole year.

J.R. Whalen: You know, a lot of this is bringing taxpayers to a full stop when they’re trying to get their taxes done. What is the source of all the confusion?

Richard Rubin: It’s different, things change. And when things change, that creates difficulty for taxpayers and confusion for taxpayers. People are used to the old system where there weren’t these additional payments over the course of the year and where you just claimed the entire child tax credit on your tax return. That’s a little different. What you basically have to do is figure out, this year, the amount of the entire credit you’re eligible for and then subtract from that what you got already in those monthly payments last year.

J.R. Whalen: Now another confusing part of this is that some people got early child tax payments and some did not. Why did that happen?

Richard Rubin: Most people who were eligible got them. There are a few specific circumstances where you might not have gotten them, because they were based on prior year’s income and data that the IRS had. So a very common example is, people who had babies in 2021. So that’s a case where the IRS was unaware of that child, because the child obviously wasn’t on your 2020 tax return. And so you didn’t necessarily get payments over the second half of 2021, but you’re now eligible for up to the full $3,600 credit on the 2021 tax return.

J.R. Whalen: So what are the tax implications of all this? How is this going to effect the amount of tax that people are going to pay when they’re doing the taxes this year?

Richard Rubin: It will, I mean, it really depends on your individual situation. So, a typical case, you would have been withholding all year, in the past you’ve had one child and you’re eligible for a $2,000 child tax credit for that kid. This year, you would have gotten $1500 over the course of last year and then would be able to claim the other $1500 as part of your tax refund in early 2022, where we are now. And so you could think of that as your sort of short $500. You’ve actually gotten more of course, but your refund may be somewhat smaller than you anticipated. But you may also have changed your withholding to reflect that, your income or other pieces of your return may have changed as well. You could be in a situation we’ve talked about where you have an additional child and so, you’re getting more of a credit than you would’ve gotten in the past. So there’s just a lot of moving parts on any tax return and it’s hard to generalize whether people are going to have bigger or smaller refunds. The key thing to remember is, that for basically everyone, this is a larger break than it was in the past.

J.R. Whalen: Yeah a lot of moving parts, like you said, a lot of dollar figures flying around. But what steps do people have to take here as they prepare their taxes to kind of get their numbers in order?

Richard Rubin: The key thing to look for is, the information that the IRS has sent out to households, and one for each parent in a two Aaron household, that shows how much they say that they sent you over the course of 2021. Because like we’ve said, you’ll have to subtract that from the total amount of the credit that you’re claiming, because you’ve already gotten it. And the IRS has is file an accurate return, so if the information doesn’t match, say the IRS says “We sent you $1500,” and you’re like, “No, I only got $1000,” or, “I didn’t get anything,” put on the return what you say you’ve gotten. But just know that when that mismatch shows up in the IRS systems, that’s going to make your refund take longer than a would otherwise, because they’ve got to sort through that to make sure that you get the right amount.

J.R. Whalen: Now I want to ask you about a few specific situations that could be tricky for taxes. What if parents have a child who was born last year or who was adopted last year, are they eligible for the tax credit?

Richard Rubin: Yes. It’s about whether the child was yours in 2021 for tax purposes. So there’s a whole set of rules that govern that, but generally, if you had a baby in 2021, you probably didn’t get those monthly payments in the second half of the year and you can claim the credit on the 2021 tax return. You can also claim a stimulus payment for that child, a $1,400 payment. So basically, if you had a baby on December 30th, you are probably eligible for $5,000, up to, the $3,600 from the child tax credit, plus another $1,400 stimulus payment.

J.R. Whalen: Now how does the tax credit work for divorced parents?

Richard Rubin: It can be really tricky. It’s common for divorce agreements to share tax custody of a child year by year, so odd years to one parent, even years to the other. It’s not the way they all work, but that’s the way some of them work. And that can be difficult, because the payments in 2021 may have been based on a 2020 return. So the money may have gone to the even year parent, but the full amount of the credit is actually owed, on the 2021 return, to the odd year parent. The odd year parent can go ahead and claim that, the difficulty comes for the even year parent who essentially received money that he or she wasn’t entitled to, ultimately. If your income is… If you’re a low or moderate income household, 40, $60,000, somewhere in there, and the IRS has details on its website about this, you don’t have to repay that. You got the money for a child who’s not ultimately yours and you just get to keep it. For middle and higher income households, you do have to repay that. Essentially, give that back as part of your tax return. And the IRS, obviously has records of who it sent money to. So those can be very tricky situations for former spouses to navigate with each other and for people to navigate with their tax advisors. And they are, again, are going to vary it on income, who has custody which year and where the payments were made, if any, during the course of 2021.

J.R. Whalen: All right, Rich, let’s look out to the future a bit. What does the child tax provision look like this year for when people are doing their taxes in 2023 and beyond?

Richard Rubin: So for the moment, although President Biden and many Democrats in Congress want to extend the 2021 rule and resume those monthly payments and the larger amounts. Were right back to the way the credit was in 2020, $2,000 maximum per child, 17-year-olds not eligible, not fully refundable. So low-income households will get up to $1,400 of the $2,000, not the full $2,000 and not that extra bonus payment for young children. So, it basically looks like the way it was. Congress can, of course, come in at any time and change that, but at the moment that doesn’t look likely.

J.R. Whalen: All right, that’s Wall Street Journal tax reporter, Richard Rubin. Rich, thanks so much for taking the time to chat.

Richard Rubin: Oh, sure. Thanks for having me.

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