The New Child Tax Credit Guidelines
Did you know you may have an extra few hundred dollars per month on the way from the IRS this July through December? If you have dependent children in your household read on to see how the updated Child Tax Credit may affect your family in 2021.
The COVID-19 pandemic has brought far-ranging changes to nearly every facet of our lives, and tax law has been no exception. As part of the expansive American Rescue Plan Act, the Child Tax Credit has seen a significant overhaul and now offers additional benefits to those raising children at home. You can see from the charts below that households earning $150,000 or less (or individuals earning $75,000 or less) qualify for the full new increased child tax credit, which is $3,600 for kids aged 5 and younger and $3,000 for ages 6 to 17. Have a child that turned 18 but is still living at home? Fear not, even you qualify for a $500 credit as your child transitions into adulthood.
What’s unique about this year’s child tax credit, on top of the increased dollar amount, is how it will be distributed to families. For the first time the IRS will be sending out half the total credit via monthly payments by check or electronic deposit. Here are a few examples of what that looks like for different households:
- Married Filing Jointly, 1 child under 6, AGI under $150,000
- Eligible for $3,600 credit, would receive $300 for 6 months (July-Dec.), claims remaining $1,800 on 2021 tax return
- Single Filer, 2 children under 6, AGI under $75,000
- Eligible for two $3,600 credits, would receive $600 for 6 months (July-Dec.), claims remaining $3,600 on 2021 tax return
- Married Filing Jointly, 3 children (ages 5, 7, & 10), AGI under $150,000
- Eligible for one $3,600 credit and two $3,000 credits, would receive $300 + $250 + $250 ($800) for 6 months (July-Dec.), claims remaining $4,800 on 2021 tax return
- Head of Household Filer, 3 children (ages 13, 17, & 18), AGI under $112,500
- Eligible for two $3,000 credits and one $500 credit, would receive $250 + $250 + $41.66 ($541.66) for 6 months (July-Dec.), claims remaining $3,250 on 2021 tax return
Keep in mind that just because your income is too high to get the full credit, you can still get a partial credit because the credit doesn’t “phase out” until a much higher AGI. For example, if you file a joint tax return you can claim a partial credit until you hit $440,000 of income! (See left side of chart below). Check out this 2021 Child Tax Credit Calculator to get a good idea of what your specific situation may look like.
This tax credit is fully refundable as well, meaning that even if your 2021 tax owed is less than you’d receive from the Child Tax Credit, you won’t forfeit any of the credit and will receive a refund instead. Even families with no earned income can take the credit if they meet all other qualifications.
The IRS is offering the option to opt out of the monthly advance payments, and for certain households this may make sense. For example, if you qualified for the credit last year but anticipate your income being higher this year, or if you can’t claim the same dependents as last year (because of divorce, graduation, etc.) then consider going to the IRS’ Child Tax Credit Update Portal. Here you can opt out of the payments as well as update address and bank information.
The revamped child credit is only on the books for 2021, but the current administration would like to see it made permanent through its proposed American Families Plan legislation. As always, we encourage you to talk to your financial planner and tax professional to see what opportunities this expanded credit may offer for you and your family.
Written By Zach Reuter, CFP®