The Expanded Child Tax Credit; 2021
Child Tax Credit Payments Will Come in July 2021 the IRS Says.
The payments will be up to $300 per month for each qualifying child age 5 and under, and up to $250 per month for each child between the ages of 6 and 17. Note that this amount phases out for those with higher incomes: single people earning more than $75,000 per year, heads of household earning more than $112,500 per year and married couples earning more than $150,000 a year. Your child tax credit payments will begin to phase out by $50 for every $1,000 of income over those threshold amounts.
Parents eligible for the expanded Child Tax Credit will begin receiving advance payments in July 2021
- Qualifying families will receive up to $3,600 per eligible child in 2021,
- This is a temporary expansion of the existing Child Tax Credit under the latest stimulus package passed in March 2021.
- With this, you don’t have to wait until you file your 2021 tax return to receive the money — instead, you’ll receive half in periodic payments throughout the second half of the year.
- If you have not filled your 2020 Tax Return, now is the time to file
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For The 2020 Tax Year, which is due by May 17, 2021
- the child tax credit is worth $2,000 per kid under the age of 17 claimed as a dependent on your return.
- The child must be related to you and generally live with you for at least six months during the year.
- He or she must also be a citizen, national or resident alien of the United States and have a Social Security number. You must put the child’s name, date of birth, and SSN on the return, too.
- The credit begins to phase out if your adjusted gross income (AGI) is above $400,000 on a joint return or over $200,000 on a single or head-of-household return. Once you reach the $400,000 or $200,000 AGI threshold, the credit amount is reduced by $50 for each $1,000 (or fraction thereof) of AGI over the applicable threshold amount.
- Up to $1,400 of the child credit is refundable for some lower-income individuals with children. However, you must also have at least $2,500 of earned income to get a refund.
What changes did Congress make to the child tax credit?
- For 2021 Tax Year: The American Rescue Plan temporarily expands the child tax credit
- First, it allows 17-year-old children to qualify for the credit.
- Second, it increases the credit to $3,000 per child ($3,600 per child under age 6) for many families.
- Third, it makes the credit fully refundable and removes the $2,500 earnings floor.
- Fourth, it requires half of the credit to be paid in advance by having the IRS send periodic payments to families from July 2021 to December 2021.
Note that the other general rules for child-tax-credit eligibility continue to apply.
- For instance, the child still must be a U.S. citizen, national or resident alien, and have a Social Security number.
- You also must claim him or her as a dependent on your 2021 tax return, and the child must be related to you and generally live with you for at least six months during the year.
- And you still have to put the child’s name, date of birth, and SSN on the return.
- Not all families with children will get the higher child tax credit, but most will.
- The enhanced tax break begins to phase out at AGIs of $75,000 on single returns, $112,500 on head-of-household returns and $150,000 on joint returns.
- The amount of the credit is reduced by $50 for each $1,000 (or fraction thereof) of AGI over the applicable threshold amount. Note that this phaseout is limited to the $1,000 or $1,600 temporary increased credit for 2021 and not to the $2,000 credit.
- For example, if a married couple has one child who is four years old, files a joint return, and has an AGI of $160,000 for 2021, they won’t get the full $3,600 enhanced credit. Instead, since their AGI is $10,000 above the phase-out threshold for joint filers ($150,000), their credit is reduced by $500 ($50 x 10) – resulting in a final 2021 credit of $3,100.
- If my 2021 income is higher than the thresholds for taking the $3,000 or $3,600 per-child tax credit, can I still claim the $2,000 credit when I file my return?
- It depends. Families who aren’t eligible for the $3,000 or $3,600 credit in 2021, but who have AGIs at or below $400,000 on joint returns or $200,000 on other returns, could claim the regular credit of $2,000 per child, less the amount of any advance payments they get. Families with AGIs above the $400,000/$200,000 thresholds will see the $2,000 per-child credit reduced by $50 for each $1,000 (or fraction thereof) of AGI over those thresholds.
- For example, if a married couple has one child who is seven years old, files a joint return, and has an AGI of $415,000 for 2021, they won’t get the full $3,000 enhanced credit. First, because of their high income, they don’t qualify for the extra $1,000 (see question above), so their credit is reduced to the regular amount of $2,000. Then, since their AGI is $15,000 above the second phase-out threshold for joint filers ($400,000), their credit is reduced again by $750 ($50 x 15) – resulting in a final 2021 credit of $1,250.
- Question: Can I take the higher child tax credit for my daughter who turns 17 in 2021?
- Answer: Yes. If you meet all the other rules for taking the child tax credit, you can claim the credit for your daughter when you file your 2021 Form 1040 next year. The American Rescue Plan broadened the age for children qualifying for the credit for 2021 from 16 and under to 17 and under. So, 17-year-olds qualify as eligible children for the child credit for 2021.
- What does it mean that the child tax credit is fully refundable for 2021?
- The American Rescue Plan makes the child credit fully refundable for people who live in the United States for more than one half of the year. Before this change, certain low-income people could only get up to $1,400 per child as a refund, instead of the full $2,000 child credit, if their child credit was more than the taxes they otherwise owed. Under the new rules for 2021, people who qualify for a child tax credit can receive the full credit as a refund, even if they have no tax liability.
- Parents don’t need to be employed or otherwise have earnings in order to claim the child credit for 2021. Prior rules limited the credit to families having at least $2,500 of earned income. For 2021, families with no earned income can take the child credit if they meet all the other rules.
- What if my family circumstances change during the year and I have more income or less income than shown on the 2019 or 2020 return that I filed with the IRS?
- As mentioned above, the IRS will generally base eligibility for the credit and advance payments, and calculate the amount of the advance payment, based on previously filed tax returns. It will first look at your 2020 return. If you haven’t filed a 2020 return, the IRS will look at your 2019 return. The IRS will assume that the number of children and the income that you reported on your 2020 (or 2019) return are the same for 2021. It will account for the passage of time only for determining the age of the children.
- The American Rescue Plan requires the IRS to develop an online portal so that you can update your income, marital status and the number of qualifying children. So, if your circumstances changed in 2021, and you believe those changes could affect the amount of your child credit for 2021, go onto that portal once it is up and running and update it for the correct information.
3. I know I will qualify for a child tax credit for 2021, but I don’t want to receive advance payments. Is there a way of opting out?
- Yes. People who want to opt out of the advance payments and instead take the full child credit on their 2021 return can do so through the online tool that the IRS will develop.
4. Will monthly payments be reduced for taxpayers who owe back taxes or child support?
- No. The IRS cannot take the payments to offset past-due federal taxes, state income taxes, or other federal or state debts. The same goes for people who are behind on child support payments. However, there are no protections against garnishment by private creditors or debt collectors.
5. Do I have to pay tax on the payments I get?
- No. The payments that you receive are advance payments of the 2021 child tax credit, so they are not taxable. On your 2021 Form 1040 that you file next year, you will reconcile the monthly payments that you receive from the IRS in 2021 with the child tax credit that you are actually entitled to. The law requires the IRS to mail out a notice by January 31, 2022, showing the total amount of payments made to you during 2021.
6. Do overpayments of the child credit need to be paid back?
- It depends. With advance payments of the child tax credit, there will sure to be instances in which families receive more in advance child tax credit payments from the IRS than they are otherwise entitled to. And the American Rescue Plan contemplates this by providing a “safe harbor” for lower- and moderate-income taxpayers.
- Families with 2021 adjusted gross income at or below $40,000 on a single return, $50,000 on a head-of-household return and $60,000 on a joint return won’t have to repay any credit overpayments that they get. On the other hand, families with 2021 adjusted gross incomes of at least $80,000 on a single return, $100,000 on a head-of-household return and $120,000 on a joint return will need to repay the entire amount of any overpayment when they file their 2021 tax return next year. And families with 2021 adjusted gross incomes between these thresholds will need to repay a portion of the overpayment.
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