Child Tax Credit Update

Child Tax Credit Payments Start July 15. Do You Qualify?
 
You may have recently received a letter from the IRS estimating the amount of payment you will be receiving as part of the American Rescue Plan Act which includes the Child Tax Credit to $3,000 per qualifying child. Even if you haven’t received a letter, you may be eligible. Read below to learn how it works.

What is the Child Tax Credit?
The Child Tax Credit (CTC) was introduced by lawmakers in 1998 to give an income boost to US parents or guardians of children and other dependents. You normally claim the credit on Schedule 8812 when you file your taxes. The American Rescue Plan Act expanded the CTA benefit and the expanded credits are distributed monthly.

The credit is $3,000 for each child age 6 to 17 and an additional $600 is added per child 5 years-old and under. Instead of receiving the tax credit when filing your 2021 taxes, the IRS is paying half of the credit in the form of six monthly installments, starting on July 15.

There are an additional three big changes to the Child Tax Credit, which are:
  • The new qualifying age of children is 17. In prior years, this has been 16.
  • It is available regardless of a family’s income (prior rules required parents to have at least $2,500 of earned income). It is also fully tax refundable (before, the refundable amount was capped at $1,400).
  • Changes will last for one year. As of now it is unclear whether this change will be permanent.
The IRS will send out advance Child Tax Credit Payments to eligible families on these dates.
  • July 15, 2021
  • August 13, 2021
  • September 15, 2021
  • October 15, 2021
  • November 15, 2021
  • December 15, 2021
Qualifying parents or guardians will get the payments direct-deposited into their bank account or sent in the mail by check or debit card. Here are the qualifications to receive the new Child Tax Credit.
  • Be a U.S. Resident
  • Have a 2019 or 2020 tax return, or have signed up for the Economic Impact Payment (stimulus check) during the COVID-19 pandemic.
  • Have a qualifying child under the age of 18 as of December 31, 2021. This includes children born on or prior to December 31, 2021.
  • Make less than $75,000 per year (or $112,500 for heads of household, or $150,000 for married couples filing jointly).
Even if you make more than the income limits, you may still get some form of payment because the credit phases out by $50 for every additional $1,000 you make- down to the original $2,000 credit. If you didn’t file a tax return or never accepted a stimulus check, but you meet all of the other requirements listed above, you can still qualify. You can use the Non-Filer Sign-Up tool on the IRS website.

It is important to know that you do not have to accept the advance monthly payments. The credit is estimated using your most recent tax return; however it is truly based on your 2021 return. If you have any changes to your 2021 tax return you could potentially be required to pay the money back. For example, if you claim a child on your 2020 tax return, then receive the prepayment of the child tax credit but you do not claim the child on your 2021 return, you will need to pay the credit back on your return. You can choose to opt-out of the advanced payments and wait to use the credit at tax-time. If you would like to opt out of the advance payments, or you need to update your information, you must use the Child Tax Credit Update Portal.

The key for clients is to understand how the credit works and to make an informed decision whether to take the advanced payment or wait to get the credit on your 2021 return. We encourage clients to visit with their tax professional for estimates on 2021 income. Our team is happy to work with you and your tax professional to plan potential strategies to make use of the advance payments or reduce taxable income if you are nearing income limits for 2021.


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This article is for information purposes only. We are not a tax-advisor company. There may be additional guidelines and information regarding your personal tax situation not included in this article that you will need to consult with your tax professional about.