The American Rescue Plan included a significant overhaul of the child tax credit. It not only expanded the amount of the credit, but it also created a newly advanceable monthly payment; and many taxpayers will see the impact of these changes very soon.
Expanded Child Tax Credit
For 2021, the maximum child tax credit has been increased from $2,000 to $3,600 for qualifying children under the age of 6, and to $3,000 per child for qualifying children between the ages of 6 and 17. The entire credit is now fully refundable for most taxpayers.
The child tax credit is available to taxpayers with a modified adjusted gross income (AGI) of: $75,000 or less for single filers; $112,500 or less for heads of household; and $150,000 or less for married couples filing a joint return. Above these income thresholds, the extra amount above the original $2,000 child tax credit (either $1,000 or $1,600 per child) is reduced by $50 for every extra $1,000 in additional modified AGI. Once the extra amount is eliminated, the amount of the credit remains at the original $2,000 until the present law phase-out thresholds are reached ($400,000 for married couples and $200,000 for all other filers).
Advance Child Tax Credit Payments
Starting July 15 and continuing monthly through December 2021, the IRS will advance one-half of the estimated 2021 child tax credit in monthly installments to eligible taxpayers by direct deposit, paper check or debit card. The payment will be up to $300 per month for each child under age 6 and up to $250 per month for each child ages 6 through 17. The remaining half of the credit not paid in advance is claimed when filing your 2021 tax return, as the full child tax credit is claimed on the return, but reduced by the aggregate advance payments received.
The IRS has started sending out letters to more than 36 million American families who may be eligible to receive these payments. Families that are deemed eligible for the advance child tax credit payments will receive a second, personalized letter listing an estimate of their monthly payment. Most families do not need to take any action to get their payment. The monthly advance payments will be estimated from their 2020 tax return, or their 2019 tax return if 2020 information is not available. The IRS urges people with children to file their 2020 tax returns as soon as possible to provide their most current banking information, as well as key details about qualifying children.
If a taxpayer receives advance payments in error for a child that will no longer be claimed as a qualifying child in 2021, there is a “hold-harmless” provision that is intended to protect taxpayers from having to payback these amounts. The income thresholds for this provision are relatively low and were intended to protect those most in need. Any taxpayers that do not meet the income requirements under this provision will be required to repay the advance credit amounts received when filing their 2021 tax return.
Eligible taxpayers who do not want to receive advance payment of the 2021 child tax will have the opportunity to decline receiving advance payments. Click here to visit the IRS Child Tax Credit Update Portal to manage your options.
For more information, contact Melissa Howell, CPA, Principal, Small Business Department at mhowell@tsacpa.com, or at 716.633.1373.
