Important Changes to the Child Tax Credit

The American Rescue Plan Act, enacted in March 2021, made changes to the Child Tax Credit which will benefit many taxpayers.

• The credit is fully refundable (meaning you can receive it even if you do not owe the IRS) for taxpayers living in the US, and US armed forces members.
• Starting in July 2021, taxpayers may receive monthly payments up to half of the total credit.
• The amount has increased from $2,000 to $3,000 per qualifying child ($3,600 per child under age 6.)
• Qualifying children now include those under age 18, up from the prior age limits.

The IRS will pay half of the Child Tax Credit in the form of monthly payments starting July 15, 2021, unless the tax filer contacts the IRS to decline this option.  Taxpayers who receive the advance payments will then claim the other half when they file for their 2021 income tax return.

These tax changes will only apply to the 2021 tax year. Though temporary, these changes may present important cashflow and financial opportunities. It is also significant to note that the monthly advance of the child tax credit is a substantial change. The credit is normally part of your income tax return and reduces your tax liability. Choosing to have the tax credit advanced will affect your refund and the amount due when you file your return.

How much to expect and the qualifications:

The child tax credit advanced payments are based on a number of factors, including the age of your children and household income.

• For children ages 5 and younger the credit is up to $3,600 with up to $300 received in monthly payments.
• For children ages 6 to 17 the credit is up to $3,000 with up to $250 received in monthly payments.

In order to qualify for the child tax credit advanced monthly payments, you (and your spouse if you file a joint tax return) must have:

• Your primary home in the U.S. for more than half of the year or file a joint return with a spouse who does.
• File a 2019 or 2020 tax return and claim the child tax credit or give the IRS your information using the non-filer tool.
• Met income requirements explained more fully below.
• A child under the age of 18 at the end of 2021 who has a valid social security number.

You may take full advantage of the tax credit if your income (principally, your modified adjusted gross income) is less than $75,000 if filling alone or $150,000 if filing jointly and $112,500 for head of household filers. After which the credit begins to phase out above those thresholds.

Families with high incomes, for example married filing jointly filers with an income of $400,000 or less or other filers with an income of $200,000 or less, will generally get the same credit as before (usually $2,000 per child that qualifies) but may also choose to receive monthly payments.

In general, taxpayers will not need to do anything to receive these advanced payments as the IRS will use the information it has on file to begin issuing child tax credit payments.

IRS’s child tax credit update portal

Taxpayers can update their information using the IRS’s child tax credit and update portal to revise their information, such as filing status or number of children. You may also use their online portal to opt-out of advance payments or check the status of payments.

There is also a non-filer portal to use for certain situations if you qualify.

Should you wish to discuss these changes and how they affect you, please do not hesitate to contact us.