More than 36 million families could soon start receiving advance monthly payments of the Child Tax Credit, which was expanded for 2021 as part of the American Rescue Plan Act. Last week, the IRS started sending letters to potentially eligible families explaining their options for receiving the payment. The IRS will open a new web portal on July 1 where taxpayers can update and adjust information related to payment eligibility. The payments will be issued via direct deposit or check starting on July 15 and running through December.
Eligible taxpayers should use this time before the July 1 portal opening to explore the best method to receive the credit based on their unique financial and personal circumstances. Below, we offer overview of the expanded credits, calculation examples, frequently asked questions and key considerations.
How did the Child Tax Credit change for 2021?
The American Rescue Plan Act increased the Child Tax Credit from $2,000 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.
Another new facet is that half of the 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. For 2021, the Child Tax Credit is fully refundable, covering taxpayers who do not have earned income or do not owe any income taxes.
All of the changes described here are effective for 2021 only without additional Congressional action.
Who is eligible for the expanded Child Tax Credit?
The increased credit (the extra $1,000 or $1,600 depending on the child’s age) gradually phases out for adjusted gross income (AGI) of:
- $75,000 (single filers)
- $112,500 (head of household filers)
- $150,000 (married filing jointly)
The credit reduces by $50 for each $1,000 of AGI over the applicable threshold amount.
For the remaining, original portion of the Child Tax Credit ($2,000), the previous AGI phase out levels apply: $200,000 (single and head of household filers) and $400,000 (married filing jointly).
2021 Child Tax Credit: Two Examples and a Calculator
Let’s use two hypothetical scenarios to illustrate how the expanded Child Tax Credit works.
Example #1: A married couple has one four-year-old child and adjusted gross income of $160,000 for 2021. Since their AGI is more than $150,000, the couple’s new, increased credit of $1,600 is reduced by $50 for each $1,000 over AGI threshold, which totals $500 ($160,000 – $150,000 = $10,000; $50 x 10 = $500; $1,600 – $500 = $1,100). The couple is eligible for the full, original Child Tax Credit of $2,000. So in total, they will receive a $3,100 credit. If they elect advance payments, they will receive half of that amount over six months ($1,550/6 = $258.33) and the other half will be claimed on their 2021 tax return.
Example #2: Let’s take the same family from above but increase their adjusted gross income to $415,000. They are completely phased out of the new, increased credit, so they will not receive any of the $1,600. Their AGI is over the original Child Tax Credit threshold, so it is reduced by $50 for every $1,000 above the $400,000 level. Based on that calculation ($415,000 – $400,000 = $15,000; $50 x 15 = $750), their total credit for 2021 is $1,250 ($2,000 – $750). This family would receive $625 over six months and $625 on their 2021 tax return.
Use this calculator from Kiplinger to determine your family’s benefit.
I received an IRS letter. What should I do now?
The IRS letter gives eligible families the opportunity to select their method of receiving the Child Tax Credit. It also announces a new web portal that will open on July 1 and give 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. Visit irs.gov/childtaxcredit2021 for the latest updates and resources and read more FAQ responses from the IRS.
After this first communication regarding eligibility and payment method, the IRS intends to send a second letter informing families how much they will receive based on 2020 or 2019 tax returns. If you’d like to run your own calculations in the meantime, use this online calculator.
Key considerations for the Child Tax Credit
Eligible families who decide to receive the advance monthly payments need to understand what this could mean for their 2021 tax returns. Here are a few things to consider and discuss with your RKL advisor:
- Income increases: The credit is calculated based on 2020 income. If you expect your income to rise during 2021, keep in mind the adjusted gross income thresholds. If you exceed them, not only will your credit amount diminish, you may also owe money at tax time.
- Lower or nonexistent refund: For many families, the Child Tax Credit is what pushes them to a larger tax refund. By taking half of the credit in advance, taxpayers should prepare themselves for the possibility of a smaller or nonexistent refund, or in extreme cases, a tax liability owed.
- Reconciliation on 2021 returns: Similar to the stimulus checks, the Child Tax Credit advances will be reconciled on 2021 returns. Unlike the stimulus checks, however, any excess payment of the Child Tax Credit received in advance will be returned as part of final 2021 tax due. Eligible families should keep track of monthly payments for tax purposes. When this reconciliation between 2020 income and 2021 advance payments occurs, the actual amount of credit could go up or down depending on income levels. Taxpayers are responsible for returning any overpayment via their 2021 returns.
The expanded tax credit is a significant government benefit, but it is important to understand the impact on your family’s bottom line and plan accordingly. Questions about the Child Tax Credit? Contact your RKL advisor or reach out using the form below.