Child Tax Credit: Who Gets It and What to Know
Big changes are coming to the child tax credit, and they could make things a little easier for families struggling financially during the pandemic. The American Rescue Plan Act, commonly referred to as the March 2021 stimulus bill, increases the tax credit benefit for eligible families. How much of a boost you’ll see depends on your income and your children’s ages.
According to the IRS, the impact will be widespread—nearly 90% of children in the U.S. will get the benefit automatically.
However, the boost comes as a refundable tax credit, and almost everyone can agree that taxes are complicated. Luckily, we’ve done the research and have the answers to your top child tax credit questions.
What is the child tax credit?
The child tax credit (CTC) itself isn’t new. It began as part of the Taxpayer Relief Act of 1997 to grant a tax benefit to American taxpayers with a qualifying dependent child. Essentially, it provides a tax advantage to parents or guardians with children or other dependents under 17.
How is the new child tax credit different?
Before this new change, the CTC provided $2,000 for each qualifying child age 16 or younger. Individuals earning over $200,000 ($400,000 for married couples who file jointly) received a $50 reduction for every $1,000 of income over the threshold.
If the CTC was more than the taxes owed, taxpayers might have been eligible to receive all or part of the credit as a refund as part of the additional child tax credit (ACTC).
However, the American Rescue Plan Act of 2021 (ARPA) significantly expanded the CTC. The changes include:
● Increasing the maximum age for a qualifying dependent child to 17 years
● Increasing the maximum credit from $2,000 per child to $3,600 for children 0 to 5 years and $3,000 for children 6 to 17 years.
● Making the credit fully refundable by eliminating the ACTC cap
● Providing part of the credit in advance of filing the 2021 tax return
The changes are meant to specifically benefit low- and moderate-income families who may have been hit especially hard during the pandemic. While higher-income families may not gain from the alterations, they can generally count on getting the same benefit as under prior law.
Who qualifies for the child tax credit stimulus bill?
This is the burning question on parents’ minds around the country—who qualifies for the child tax credit 2021 stimulus? The answer may come in a letter from the IRS. In June 2021, the IRS began notifying more than 36 million families that they may qualify for the expanded CTC.
Here’s how to know if you’re eligible—you’ll receive the full benefit if you have a qualifying child and your modified adjusted gross income (AGI) is:
● $150,000 or less for married taxpayers filing jointly (and qualifying widows or widowers)
● $112,500 or less for heads of household
● $75,000 or less for all other taxpayers
If your income is more than the capped amount, you could be subject to a child tax credit phase out. In that case, your benefit will be reduced by $50 for every $1,000 in modified AGI over the limit.
How can you receive the credit?
The ARPA allows eligible taxpayers to receive half of the expanded credit amount in monthly payments from July through December 2021. Families can start receiving their first payments on July 15, 2021, and will continue on the 15th of each month through the end of the year, unless the 15th is a weekend or holiday.
If you qualify, the IRS says you don’t need to take any action now. The exception is if you haven’t yet filed your 2020 tax return—you should file that promptly if you haven’t already done so.
But you can opt out of the advanced payments if you’d rather receive the entire portion on your tax return as you have in previous years. The IRS has created an online portal that allows you to decline automatic monthly payments. It should be available later this year.
Will the child tax credit affect your next year’s tax return?
In short, yes. The CTC is an advance on the benefit you may receive when filing next year’s tax return. The monthly payments aren’t “free” money. The IRS will deduct the amount you get between July and December from the credit you earn when you file your 2021 tax return in April of 2022.
Because you’re receiving it in advance, you may end up owing more at tax time—even if your income is exactly the same as the previous year.
For example, if you qualify for a $3,000 child tax credit under the new ARPA guidelines, you could receive half now and half when you file next year’s taxes. So, instead of receiving a $3,000 credit when you file your 2021 tax return, you’ll only get a $1,500 credit—because you were already paid the other half.
HOW MUCH OF A CREDIT WILL YOUR RECEIVE?
Are you curious to know if you qualify for this extended child tax credit? You can enter your information into this simple calculator to help you understand how much you may receive in monthly payments and how much you’ll receive as a credit on your tax return!
As you can see, tax credits can be tricky, and the choice to receive the child tax credit stimulus monthly payment vs. opting out is a personal decision. If you’re not sure what would be best for you, we’re here to help. Reach out for tax planning strategies that can help your finances.
Brandy Branstetter, CFP(R)