Did you recently receive a letter from the IRS regarding the Child Tax Credit? The IRS notified more than 36 million families of their potential eligibility for advanced monthly payments of the Child Tax Credit, which was expanded for 2021 as part of the American Rescue Plan Act. The monthly payments will be issued via direct deposit or check starting on July 15 and running through December.
Families can learn more and adjust their information at irs.gov/childtaxcredit2021. This portal gives taxpayers a number of self-service options, including entering direct deposit information, opting out of the advance payments, updating relevant data for mid-year payment adjustments, and more. Taxpayers who take no action will automatically receive the monthly payments.
Use this time before monthly payments to begin to consider the optimal method to receive the credit based on your personal financial circumstances. Let’s take a look at the changes to the Child Tax Credit, eligibility, and biggest considerations.
Changes for 2021
The American Rescue Plan Act changed the Child Tax Credit in several key ways for 2021 only (minus additional congressional action): increased credit amounts, expanded age eligibility, and new advance payments. The original $2,000 Child Tax Credit increases to $3,600 for children under age six and $3,000 for other children under age 18. Previously, the credit did not apply to 17-year-olds.
Half of a family’s credit amount will be paid in advance through monthly payments between July and December 2021; the rest will be applied as normal on 2021 tax returns. The Child Tax Credit is fully refundable for 2021, covering taxpayers who do not have earned income or do not owe any income taxes.
Eligibility for expanded credit
The extra $1,000 or $1,600 Child Tax Credit gradually phases out for adjusted gross income of $75,000 (single filers), $112,500 (head of household filers), or $150,000 (married filing jointly). The credit payment decreases by $50 for each $1,000 of adjusted gross income over the relevant threshold amount. The adjusted gross income phaseouts for the original portion of the Child Tax Credit ($2,000) still apply: $200,000 (single and head of household filers) and $400,000 (married filing jointly).
Potential impact on 2021 tax return
Eligible families who decide to receive the advance monthly payments need to understand what this could mean for their 2021 tax returns. Here are some factors to consider:
- The Child Tax Credit is calculated from 2020 income (or 2019 income if you have not filed yet for 2020). Watch the adjusted gross income thresholds if you think your income may rise in 2021. Exceeding a threshold will not only diminish credit amount, but also cause tax to be higher.
- The Child Tax Credit pushes many families to a larger tax refund. By taking half of the credit in advance, taxpayers could create the possibility of a smaller or nonexistent refund, or in extreme cases, a tax liability owed.
- Advances of the Child Tax Credit will be reconciled on 2021 returns against 2020 income. This reconciliation could cause the actual credit amount to go up or down depending on income. Taxpayers should keep track of monthly payments since they will be responsible for returning any excess advanced payments via their 2021 returns.
The team of advisors at RKL can help you understand the impact of this expanded tax credit on your family’s bottom line and plan accordingly. Contact the firm’s Exton office at 484-874-2200 or visit rklcpa.com to start the conversation.
ABOUT THE AUTHOR
Ruthann Woll is a Partner in RKL’s Tax Services Group. For more than two decades, she has helped community benefit organizations and individuals manage tax compliance, navigate tax reporting complexities, and secure favorable tax treatment. Woll oversees firm-wide individual tax planning and compliance efforts and leads RKL’s nonprofit tax niche.