Can you claim child tax credit with no income?

The American Rescue Plan enacted in March included a number of policies designed to give a leg up to those that struggle to make ends meet. In particular, the enhanced Child Tax Credit for the 2021 fiscal year could cut childhood poverty in half.

This feat will be achieved if the parents of those children are signed up for the newly created advance payment program which started sending cash to families 15 July. Prior to the changes taxpayers had to claim the credit when they filed their taxes and there was an earnings floor that had to be met before a parent could begin to claim the credit.

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What is the Child Tax Credit?

Before the changes were made to the structure of the Child Tax Credit under the American Rescue Plan, it had been adjusted in 2017 as a part of the Tax Cut and Jobs Act (TCJA). This saw the credit expanded to $2,000 per child, but only $1,400 of that was refundable. Furthermore, in order to claim the refundable portion of the credit, a filer had to show earned income of more than $2,500.

Now that the earnings floor has been removed and the credit is fully refundable, it is expected that childhood poverty could be reduced by half in 2021. But the measure will be temporary, with the changes set to expire at the end of the year. President Biden has said that he wants to extend the expansion until 2025, when the changes made in 2017 will expire as well, dropping the credit back to $1,000. The hope is that the enhanced credit will prove so popular that voters will want the changes to be made permanent.

Congressional Democrats, for their part, would like to make the changes to the credit permanent starting this year as part of the American Families Plan but that won’t be possible at this time. An extension is penciled into the $3.5 trillion Democrat-only budget deal taking shape, along with the $1.2 trillion bipartisan infrastructure bill, in the Senate.

How much will families receive per child?

Eligible families can receive up to $3,600 for each child under six years of age and $3,000 for every child six to 17. If extended, the credit would be broken into 12 installments of up to $300 or $250 over the year depending on a child’s age. The age limits apply to the age of a child at the end of a fiscal year, so if a child turns 18 for example before 1 January of 2022, they will not qualify for the 2021 Child Tax Credit.

Since payments began in July, parents will receive six installments, or half the credit, this year and collect the remainder of the tax credit that they are entitled to when they file taxes in 2022. The credit is fully refundable, so if a family owes less than the amount of the credit, they will receive the excess as a tax refund.

Who is eligible to receive the enhanced Child Tax Credit?

Under the new legislation, individuals will qualify for the full value of the Child Tax Credit so long as their annual earnings are below $75,000; or a joint income of up to $150,000 for married couples, widows, and widowers and $112,500 for heads of household. If household earnings surpass these limits, a reduced credit will be distributed. For every additional $1000 in income, the credit's value will be gradually phased out $50.

The IRS determined individuals’ eligibility and automatically registered everyone who filed a tax return for 2020 or 2019, as well as those who have used the agency’s online tool for Non-Filers over the past year. To be eligible, a taxpayer must have their main home in the US for more than half the year and care for the dependent for at least half of the calendar year. The IRS urges taxpayers with children to file a 2020 tax return as soon as possible, if they haven’t already, to get the correct amount from the tax credit. This includes those with no income who are eligible to receive the credit but are not normally required to file taxes.

The IRS has created an online portal where parents can sign up if they are not required to file a tax return. However, there were several changes to the tax code and you may want to see if filing a tax return could be more beneficial. The agency recommends filing electronically and using direct deposit to receive refunds and the advance payments faster.

Why you might have to return the advance payments

With advance payments on last year’s information, or even from 2019, there are sure to be some overpayments. Although the legislation creates a “safe harbor” for lower- and moderate-income taxpayers, above a threshold, taxpayers would need to repay any overpayments they received.

Households with adjusted gross income at or below $40,000 on a single return, $50,000 on a head-of-household return, and $60,000 on a joint return won't have to repay any overpayments on the Child Tax Credit that they receive. However, those households making at or above $80,000, $100,000, and $120,000, respectively, will need to repay the entire amount of overpayment. For households with earnings in between these thresholds, they will need to repay a portion of any overpayments received.