The 2021 Child Tax Credit: An Overview

The tax give-back for parents of young children is different in 2021

Every year, the Child Tax Credit reduces the tax liability of American parents. If it lowers their tax burden below zero, it can even put money in their pockets. The credit’s size increased following the Tax Cuts and Jobs Act of 2017. And now, thanks to the American Rescue Plan Act of 2021, it’s even bigger—and slightly more complicated—for the 2021 tax year. Here’s what you need to know.

Child Tax Credit Basics

Before the American Rescue Plan Act, American parents, who met certain income thresholds, could claim a $2,000 tax credit per dependent child younger than 17. As a tax credit, it directly reduces income taxes owed, dollar for dollar. That means someone who owed $3,000 in federal income taxes before claiming the old credit (for one dependent child) would owe only $1,000 afterward. Tax deductions, on the other hand, reduce your taxable income and may have a smaller effect on your ultimate tax bill.

The old Child Tax Credit was partially refundable. If claiming the Child Tax Credit lowered your tax liability below zero, the IRS would cut you a check for the difference, maxing out at $1,400 per dependent child.

How 2021 is Different

The American Rescue Plan Act changed the tax credit for just one year. Taxpayers can now claim a credit of $3,000 for every dependent child between the ages of 6 and 17 (inclusive) and $3,600 for every dependent child 5 or younger. The credit is now fully refundable — which means if your tax burden is low enough you could receive the entire credit as cash — and there is no lower income limit. The additional $1,000 or $1,600 of each credit and the original $2,000 phase out at higher incomes levels.

Rather than wait for Americans to file their 2021 tax returns, the government is distributing half the credit ahead of time in the form of monthly checks. The program covers roughly 39 million households and about 88 percent of the children in the United States.

How Monthly Payments Work

Families began receiving advance monthly payments on their estimated 2021 Child Tax Credit in July 2021. Checks are typically $250 or $300 per child and will continue through December. The balance will be disbursed with your 2021 tax refund.

Because the advance payments are based on previous tax information, some families receiving checks won’t end up qualifying for the credit when they file for 2021. In that case, taxpayers will be responsible for returning the payments. If your income increased in 2021, threatening your eligibility for the Child Tax Credit, it may make sense to wait to spend the money or opt-out of advance payments.

Setting Expectations and Managing Monthly Payments

The Advance Child Tax Credit Eligibility Assistant on the IRS website can help you determine whether you qualify. By answering a few questions, you can see how much you should expect to receive for 2021. If you’d rather not receive advance payments, you can use the online Child Tax Credit Update Portal to opt-out.

This one-year increase to the Child Tax Credit will be a boon to parents of young children, but it comes with caveats that could leave some taxpayers unexpectedly owing money when they file their return. It’s important to understand how it will affect you specifically so you can know whether to spend those checks. Keep in mind that unless Congress passes a law extending the Child Tax Credit increase, the value of the credit reverts to a partially refundable $2,000 credit per child for 2022.

SOURCES:

https://www.irs.gov/credits-deductions/advance-child-tax-credit-eligibility-assistant

https://www.irs.gov/tax-professionals/accessibility-guide-for-child-tax-credit-update-portal

https://home.treasury.gov/news/press-releases/jy0177

https://home.treasury.gov/news/press-releases/jy0177

https://www.fool.com/taxes/2018/01/09/the-2018-child-tax-credit-changes-what-you-need-to.aspx

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As we head into 2022, Amelia, Amy, and I are thrilled and excited to announce the merger of Howell Financial Advisors with Total Wealth Planning, LLC, based in Cincinnati, OH. We are now the Carmel, IN office of Total Wealth Planning and our office remains at its current location.

ENRICHING LIVES THROUGH FINANCIAL GUIDANCE

I have known the Total Wealth Planning team and their principals for over 12 years, which means we chose the right partners. Total Wealth Planning shares our same personal and professional values as objective, Fee-Only fiduciaries. Our common purpose is to deliver exceptional wealth management and life planning experiences for our mutual clients.

Amelia, Amy, and I, along with the entire Total Wealth Planning team, look forward to continuing to guide you through complex financial decisions that can impact you, your lifestyle, and your family’s financial future. We could not be more pleased about this new chapter in the life of our firm, and also for you, the most valued members of our business.

Learn more about our new venture with Total Wealth Planning and how this will benefit you at:

https://twpteam.com/howell/

As always, we are here for you.

We will see you in 2022!