The child tax credit is a federal benefit that reduces income tax liability for people with children. It was created in 1997 and since then has expanded several times. It is a credit that reduces taxes owed as opposed to a deduction that reduces taxable income. The temporary changes in effect for 2021 make it a near-universal monthly child allowance, far from the annual tax break it started as. The changes came about as part of the $1.9 trillion Covid-19 stimulus bill passed in March
Here is how it works.
How big is the credit?
Until 2021, the credit was $2,000 per child under age 17, based on the child’s age at the end of the year. For 2021 only, Congress increased the credit to $3,000 for children ages 6 to 17 and $3,600 for children under age 6.
Are there limits based on income?
On the low end, there were limits, but they have been removed for this year. Until 2021, low-income households that didn’t owe income taxes could get up to $1,400 of the $2,000 credit. This year, they can get the full credit even if they have no income.
On the high end, some limits are still in place. The expanded portion of the credit starts phasing out once income reaches $75,000 for individuals, $112,500 for heads of household and $150,000 for married couples. The base $2,000 credit for higher-income households remains, and that phases out once income reaches $200,000 for individuals and $400,000 for married couples.