As a part of American Rescue Plan Act of 2021, significant changes have been made to how the Child Tax Credit works in 2021. Here is what you need to know if you have kids:
- The previous Child Tax Credit has been increased from $2,000 to $3,000 per child 6-17 and $3,600 per child 0-6.
- Part of the credit is being paid in advance, beginning monthly in July 2021.
- The rest of your credit will be claimed when you file your 2021 tax return.
Child Tax Credit Amount
The amount you will receive depends on your income in 2021. If you file a joint tax return and have a Modified Adjusted Gross Income (AGI) below $150,000, or file an individual tax return and have an AGI below $75,000, you will receive the full tax credit. For every $1,000 your AGI is above the applicable phase out, you will lose $50 of the credit.
|Amount||Joint AGI Phase Out Begins||Joint AGI Phase Out Ends||Individual AGI Phase Out Begins||Individual AGI Phase Out Ends|
|Original Child Tax Credit (Still applies 2021)||$2,000.00||$400,000.00||$440,000.00||$200,000.00||$240,000.00|
|Enhanced 2021 Child Tax Credit Age 6-17||$1,000.00||$150,000.00||$170,000.00||$75,000.00||$95,000.00|
|Enhanced 2021 Child Tax Credit Age 0-6||$1,600.00||$150,000.00||$182,000.00||$75,000.00||$107,000.00|
|Total 2021 Child Tax Credit||$3,000-$3,600|
Another change for 2021 is for children that turn 17 this year. Normally, only children under the age of 17 are eligible to receive the Child Tax Credit. This has been increased to 18 for 2021. So if your child turns 17 in 2021, you will still be eligible for the tax credit for one more year.
If you claim a dependent that is 18, or is 19-24 and attending college full time, the $500 tax credit still applies. This is not paid in advance, and can be claimed when you file your 2021 tax return.
A big change for 2021 is that 50% of your 2021 Child Tax Credit may be paid monthly in advance beginning July 15th 2021. You can expect a payment from the IRS of $300 for children under 6, and $250 for each child between 6 and 17. The rest of your Child Tax Credit will be received when you file your 2021 tax return (like most traditional tax credits).
It is worth noting that if based on your 2021 income you end up not being eligible for the Child Tax Credit payments, you may end up owing that amount back to the IRS when you file your 2021 tax return. This could occur if your AGI is more than $400,000 in 2021 and you receive the advanced tax credit payments.
For now, the changes to the Child Tax Credit are temporary and only apply to 2021. However, some or all of the changes may be made permanent when congress takes on tax reform later this year.
You may want to update your information with the IRS if:
- Your Modified Adjusted Gross Income (AGI) will be over $400,000 in 2021 (and was less in 2020). It may be a good idea to opt out so you don’t have to pay some or all of the payments back when you file your 2021 taxes.
- You typically owe money to the IRS when you file your tax return, or are worried you may this year.
- You had a change to your number of child dependents.
- You normally aren’t required to file a tax return but have child dependents.
You can check the status and make changes in the IRS Child Tax Credit Update Portal.
Example: Sam and Sallie have a Modified Adjusted Gross Income (AGI) of $300,000 and their kids are ages 1 and 4. Since their AGI is above $150,000, they will not receive the 2021 enhanced child tax credit. They are still eligible for the original $2,000 per child tax credit since their AGI is less than $400,000.
This will come in the form of a $600 monthly deposit beginning in July 2021 for a total of $3,600 received directly in their bank account in 2021. When they file their 2021 tax return in April 2022, they will receive the remaining $400 tax credit for a total of $4,000.
If you need the money to meet your immediate financial obligations, of course do that before anything else. If this is a little extra cash for you right now, consider making one of these 4 smart money moves to improve your financial future:
- Fortify your emergency fund
- Pay off Debt
- Contribute to a 529 plan for your child’s education
- Contribute to your retirement account