The IRS child tax credit has been a part of the tax code since 1997. This provision allows you to deduct a certain amount of money from your taxable income if you have a qualifying child. This year, the credit was expanded in an effort to help alleviate the financial difficulties caused by the pandemic. This is one way Airbnb hosts might be able to save on taxes and retain more profits, but how does the child tax credit work?
What Is the Child Tax Credit?
The child tax credit can help you reduce the taxes that you owe by as much as $1,000 for each child under the age of 17. The American Rescue Plan expanded the credit to as much as $3,600 per child, and some were able to begin receiving monthly payments of up to $250 to $300 per child without taking any action. For Airbnb hosts with children, this can mean a considerable tax savings.
The American Rescue Plan
The American Rescue plan was signed into law March 11th, 2021. The purpose of the plan was to provide some relief to those that have been the hardest hit by the economic effects of the pandemic. The American Rescue Plan provided $1,400 paychecks per person, increased the child tax credit, increased the earned income credit, and the child and independent care tax credit. It also extended unemployment insurance, provided support for small businesses, and lowered health insurance premiums. These are the main benefits, and if you want to find out more about the more about the American Rescue Plan, the White House has a website set up for more information.
How Does the Child Tax Credit Work?
The first question you might have is, who qualifies for the child tax credit?
For starters, you must have at least one child under the age of 18. You must be able to claim that child on your taxes, and they cannot be claimed by someone else. One of the changes for this year is that previously only children under 16 qualified, but the American Rescue Plan expanded it to children under the age of 17.
How Much Is the Child Tax Credit?
If you have a qualifying child, the amount that you receive is based on the age of the child. You receive $3,600 for those under the age of 6 and $3,000 for children age 6 through 17. To be eligible, you must have made under $150,000 for a couple and $112,500 for a single parent. The amount you will receive is based on a formula that takes into consideration your income and other eligibility requirements
Here is an example. A couple that makes about $100,000 with two qualifying children under the age of six can expect to receive $7,200 under the new plan. They would be eligible to receive $3600 in six monthly installments of $600 between July and December 2021. They would receive another $3600 after filing their tax return by April 2022.
Who Qualifies for the Child Tax Credit in 2022?
You need to meet certain criteria to qualify for the credit. First, your child can’t be older than 18 by the end of December 2021. Qualifying children can include a birth child, stepchild, adopted child, or foster child placed by a court. Regulations always treat adopted children as your own, even if the adoption isn’t complete by end of year.
A qualifying child cannot provide more than half of their own financial support during the tax year. Furthermore, they must live have lived with you for more than six months and be a U.S. citizen, national, or resident alien to count as a qualifying child. In addition, your family must also meet income eligibility requirements.
Child Tax Credit 2021 vs 2022
The 2021 credit increased to $3,600 from $2,000 in 2021, and you receive a credit for each child under six years of age. For children aged 6 to 17, the amount increases from $2,000 to $3,000.
Will the IRS Child Tax Credit Expire?
The child tax credit for 2021 came in response to unique circumstances. Currently, lawmakers plan to phase out the increase payments, but the bill hasn’t passed just yet. If nothing changes, the credit will revert to pre-2021 levels in 2023. The child credit tax will likely continue beyond 2023, but lawmakers haven’t set an amount as of writing.
Advances on Child Tax Credits
As part of the American Rescue Plan of 2021, some taxpayers were able to receive advance payments of up to half the expected 2021 credit. They are still eligible to claim the remainder of the credit on their 2021 taxes. To be eligible to receive advanced payments, tax filers had to have a qualified child living in the home and make under certain income levels. Filers also had to meet other requirements to receive advance payments. A complete list can be found on the IRS website.
How to Opt Out of Child Tax Credit Advances
If you were eligible to receive monthly advanced payments from child tax credits, it is possible to opt out of them if you would rather receive the entire amount as a lump sum when you file your 2021 taxes. To opt out of the advanced payments, you should go to the Child Tax Credit Update Portal, log in, and follow the instructions to update your preferences. You can also change any information, such as bank account information, using the portal.
The child tax credit can give Airbnb hosts a bit of relief to help manage monthly expenses during a time when travel is down. While the credit is for taxpayers with a qualifying child, but even if you do not have a qualifying child, there are still other programs that might be able to give you some relief on your 2021 taxes. You also might want to check and see if you qualify for the Recovery Rebate Credit and other earned income credits. Every bit helps as all of us try to manage in these challenging times.
Maximize Your Tax Credits
The pros at Shared Economy Tax specialize in finding often-overlooked tax credits that will drastically reduce your year-end tax bill. Get started with a one-on-one strategy session with one of our seasoned tax pros today to see how much you can save.