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When the American Rescue Plan Act of 2021 was signed into law on March 11, it temporarily amended the child tax credit for the 2021 tax year. This means that parents or legal guardians of children under 18 could be eligible for a larger credit than they were in 2020, depending on their income.
In addition, taxpayers eligible for a child tax credit won’t have to wait until filing their 2021 taxes to receive it. The IRS should issue the first half of the credit in periodic payments starting this July and ending in December.
Let’s find out if you’re eligible for this credit and what you can expect.
2020 Child Tax Credit
First to compare, let’s look at the child tax credit available for 2020 federal tax returns:
- Qualifying children: Those under the age of 17 were included.
- Maximum credit: It was $2,000 per qualifying child.
- Eligibility for the full 2020 child tax credit: Those who were married filing jointly with a 2020 adjusted gross income (AGI) of $400,000 or less and single or head of household filers with a 2020 AGI of $200,000 or less were eligible to claim the maximum credit for their qualifying children. As taxpayer income rose above those thresholds, the amount of the tax credit decreased and eventually phased out.
When eligible taxpayers filed 2020 federal tax returns, the amount of their credit was deducted from their AGI, thus reducing their taxable income. For example, a married couple who filed jointly and had $148,000 in 2020 AGI and two children, ages four and seven. They were eligible to take the maximum child tax credit on their 2020 federal tax return for each child for a total credit of $4,000. That credit amount was deducted from their AGI, reducing their taxable income to $144,000.
2021 Child Tax Credit
- Qualifying children: Those under the age of 18 are included.
- Maximum credit: It’s $3,600 for children under 6 and $3,000 for children 6 to 17.
- Eligibility for the full 2021 child tax credit: Although still allowing higher earners to qualify for an amount similar to their 2020 credit, the new law makes taxpayers at the following income thresholds eligible for the larger maximum credit:
- Married filing jointly: Those with an AGI of $150,000 or less.
- Head of household filers: Those with an AGI of $112,500 or less.
- Single filers: Those with an AGI of $75,000 or less.
Starting this July and continuing until December, the law directs the IRS to start paying eligible taxpayers their child tax credit in periodic installments based on their 2020 tax return or their 2019 tax return if they haven’t yet filed for 2020. On April 13, 2021, the IRS Commissioner testified to Congress and confirmed that the agency expects to comply with that start date and plans to send the payments out monthly.
On May 17, the IRS announced that the first payment will go out on July 15 and continue on the 15th of every month through the end of the year, unless the 15th falls on a weekend or holiday. The payments will be issued by direct deposit for those who provided their bank information with their 2020 or 2019 tax return. Otherwise, taxpayers will receive their credit via a monthly check or debit card.
These advance payments will amount to half of the child tax credit. The other half will be claimed by taxpayers when they file their 2021 tax return.
For example, based on their 2020 return, the above-mentioned couple would be eligible for the $3,600 credit for their younger child and the $3,000 credit for their older child for a total of $6,600. From July through December, they would receive a monthly check from the IRS for one-twelfth of that total, or $550 ($300 for the younger child and $250 for the older child). Assuming their 2021 AGI is still $150,000 or less, they would claim the remaining $3,300 of the credit when they file their 2021 return.
Other Important Facts About the 2021 Child Tax Credit
Keep in mind that these changes to the child tax credit apply only to the 2021 tax year unless Congress votes to extend them or make them permanent through the Biden-proposed American Families Plan or via some other legislation. Additionally, because the advance payments will be based on your 2020 or 2019 tax return, there is a chance the IRS could overpay you if your income significantly increases in 2021.
In the case of overpayment, you generally will have to repay the IRS when you file your 2021 tax return. However, according to the Congressional Research Service, if the overpayment occurs because the number of your qualifying children changes, those with lower incomes won’t have to repay the full amount.
The chance of overpayment is why the law requires the IRS to set up an online portal where taxpayers can choose not to receive their credit in advance payments and instead wait until they file their 2021 tax return to calculate their eligibility and receive any due credit.
This portal will also allow taxpayers to inform the IRS about the birth of a child in 2021 so that they can receive as much of their credit through advance payments as possible. In his Congressional testimony, the IRS Commissioner said the agency plans to establish this portal by July, and he committed to notify Congress if it runs into trouble meeting that deadline for the portal or the advance payments.
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