Recently, there were important changes made to the child tax credit that will benefit many taxpayers. As part of the American Rescue Plan Act that was enacted in March 2021, the child tax credit:
The amount has increased for certain taxpayers
Is fully refundable (meaning taxpayers can receive it even if they don’t owe the IRS)
It may be partially received in monthly payments
The new law also raised the age of qualifying children to 17 from 16, meaning some families will be able to take advantage of the credit longer. The IRS will pay half the credit amount in advance monthly payments beginning July 15. Taxpayers will then claim the other half when they file their 2021 income tax return.
Though these tax changes are temporary and only apply to the 2021 tax year, they may present important cash flow and financial planning opportunities today. It is also important to note that the monthly advance of the child tax credit is a significant change. The credit is normally part of a taxpayer’s income tax return and would reduce their tax liability. The choice to have the child tax credit advanced will affect a taxpayer’s refund or amount due when they file their return. To avoid any surprises, it’s important to encourage clients to contact their CPA to discuss their situation.
Qualifications and how much to expect
The child tax credit and advance payments are based on several factors, including the age of children and income.
The credit for children ages five and younger is up to $3,600 — with up to $300 received in monthly payments.
The credit for children ages six to 17 is up to $3,000 — with up to $250 received in monthly payments.
To qualify for the child tax credit monthly payments, a taxpayer (and their spouse if they file a joint tax return) must have:
Filed a 2019 or 2020 tax return and claimed the child tax credit or given the IRS information using the non-filer tool
A main home in the U.S. for more than half the year or file a joint return with a spouse who has a main home in the U.S. for more than half the year
A qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number
Income less than certain limits
Taxpayers can take full advantage of the credit if their income (specifically, their modified adjusted gross income) is less than $75,000 for single filers, $150,000 for married filing jointly filers, and $112,500 for the head of household filers. The credit begins to phase out above those thresholds.
Higher-income families (e.g., married filing jointly couples with $400,000 or less in income or other filers with $200,000 or less in income) will generally get the same credit as prior law (generally $2,000 per qualifying child) but can also have the option to receive monthly payments.
Taxpayers generally won’t need to do anything to receive any advance payments as the IRS will use the information it has on file to start issuing the payments.
IRS’s child tax credit update portal
Using the IRS’s child tax credit and update portal, taxpayers can update their information to reflect any new information that might impact their child tax credit amounts, such as filing status or the number of children. Parents may also use the online portal to elect out of the advance payments or check on the status of payments.