Significant Changes to the Child Tax Credit for 2021

Business owner reviewing changes to child tax credit for 2021

The American Rescue Plan Act (ARP), which became law in March, made several changes to the child tax credit for the 2021 tax year. Let’s review.

Changes to Child Tax Credit You Need to Be Aware Of

Receiving monthly payments may affect tax due when you file your 2021 return. Not only has your potential child tax credit been significantly increased, the ARP requires the IRS to make monthly advance payments to eligible taxpayers starting in July of this year.

These advance payments will reduce the tax credit available to you when you file your 2021 return. You may end up owing taxes with your return as a result of accepting the monthly payments established in the ARP.

Take a look at your 2020 tax return to estimate how advanced monthly payments of this credit may impact your overall tax due when you file your 2021 return.

  • To see the child tax credit you received in 2020, look at box 19 on page 2 of your 2020 tax return.
  • Look at line 37 on page 2 of your 2020 tax return to see how much you owed with your return. If you received a tax credit and still owed tax, you may want to opt out of the advance payments.
  • If line 37 is blank, you did not owe. You probably received a refund. If the refund listed on line 34 is greater than or equal to your child tax credit on line 19, you may prefer to receive the credit monthly during the year.

If you have questions or want to discuss how you should evaluate your options, give us a call. Continue reading for more details on the changes to the child tax credit for the 2021 tax year.

 

To Qualify for the Child Tax Credit

The child tax credit and advance payments are based on several factors, including the age of your children and your 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 Monthly Payments of the Credit

You (and your spouse if you file a joint tax return) must have:

  • Filed a 2019 or 2020 tax return and claimed the child tax credit or given the IRS your 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.

Income Limits to Qualify for the Credit

You can take full advantage of the credit if your income (specifically, your modified adjusted gross income) is less than $75,000 for single filers, $150,000 for married filing jointly filers, and $112,500 for 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 may also choose to receive monthly payments.

IRS’s Child Tax Credit Update Portal

The IRS has created a portal that taxpayers can use to either opt out of monthly payments or to update their filing information to reflect any new information that may impact the amount of child tax credit to which you are entitled, such as filing status or your number of children.

Access the IRS’s portal at IRS.gov.

The IRS has also created a non-filer portal which you can use to provide information in the event that you may be eligible and you did not file a 2019 or 2020 return. You can also access this portal at IRS.gov.

This is Only a Change to the 2021 Child Tax Credit

At this point, these changes apply only to the Child Tax Credit for the 2021 tax year. The current administration has proposed several changes to the current tax law, including making all, or portions, of this change permanent.

New tax laws are usually passed in the final hours of any tax year. It could well be December 31st before we know if any changes will be extended beyond this year.

If you need help evaluating if you should take the monthly payments or opt out for 2021, give us a call. We can help.