10 Jun FAQs about the Child Tax Credit Increase and Advanced Payments
The federal government has recently announced that it will be sending out more checks to the American public. But this isn’t another round of COVID relief payments. Rather, the checks that families will be getting each month between July and December are an advance on their 2021 child tax credit. What does this mean for your taxes, and what other changes have been made to the child tax credit? Keep reading to get answers from our Provo tax experts regarding the most frequently asked questions on this topic.
What Changes Were Made to the Child Tax Credit?
The American Rescue Plan Act of 2021 significantly altered the child tax credit for the current tax year. Here are the major changes you should be aware of:
- Increased credit amount – For 2020 tax returns, parents could receive a $2,000 child tax credit for each dependent child. For 2021, this amount has been increased to $3,000 (or $3,600 for kids 6 and under).
- Increased age limit – The previous child tax credit only applied to children 16 and under. This year, 17-year-old dependent children also qualify for the tax credit.
- Fully refundable – Of the $2,000 you could previously receive, only up to $1,400 of that credit could actually be given to you in a tax refund. For 2021, the full $3,000 or $3,600 per child (depending on age) can be refunded to you.
- Half paid in advance – Finally (and perhaps most notably), the IRS is required to pay out half of your child tax credit between July and December of 2021. This is where those monthly checks come in.
These changes are quite significant, and can greatly increase the amount you’re able to receive in child tax credits for the year. They can provide some much-needed relief to American parents, many of whom have had to deal with income loss and increased childcare costs in the wake of the pandemic and consequent school cancellations.
Do All Families Qualify?
Not all families with children will receive the increased child tax credit. Like most credits, this one has an income threshold where the benefit begins to phase out. Those thresholds are:
- $75,000 for single returns
- $112,500 for head-of-household returns
- $150,000 on joint returns
For every $1,000 above the applicable threshold, your credit will be reduced by $50 per child. However, this threshold and phase out only applies to the expanded tax credit, and not to the base $2,000 tax credit you would normally receive. So, if your income is high enough to completely phase out the enhanced child tax credit, you can still receive that base amount of $2,000 per qualifying child.
Do Children Born in 2021 Qualify?
Yes, if you had a baby (or will be having a baby) in 2021, you can receive the enhanced child tax credit for that child. If you want to receive the advanced payments from the IRS, you will need to update your personal information through the IRS’s portal. (That portal is still under development, but will hopefully be available soon.) If you don’t update that information, you won’t get the advanced payments, but will receive your eligible tax credit amount when you file your 2021 return.
How Does It Affect My Tax Return?
First, it’s important to note that, as an advance on a tax credit, any payments you receive between now and the end of the year are not taxable income. However, you will have to reconcile those payments with the child tax credit amount that you are entitled to when you file your 2021 tax return. This does mean that, in some cases, you may have to pay back an overpayment on this credit. If you were not overpaid, you will receive the additional credit you’re due when you file.
Can I Opt Out of Payments?
If you qualify for a child tax credit but don’t want advance payments, you can opt out of them via that portal we mentioned earlier—as soon as it’s ready, of course. This ensures you don’t have to worry about overpayments that you need to pay back later, and provides you with any amount your due when you file your return.
If you have any further questions regarding the enhanced child tax credit, how your credit amount is calculated, or how it will impact return, please reach out to our Provo tax experts here at The Accounting Guys, and we will be happy to assist you.