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Child Tax Credit 2021: What’s New, Who Qualifies, and What It Means for Your Wallet

Thanks to a provision in the American Rescue Plan, millions of parents across the country are set to receive a monthly payment through the end of the year — which varies based on age for children 17 and under. 

While an unexpected windfall is rarely unwelcome, it may be wise for parents to take a closer look at the new monthly child tax credit to better understand how it works and what it means for their 2022 taxes. 

How it works

Traditionally, parents who earn at least $2,500 per year qualify for a $2,000 credit for each child under the age of 17. In the event that the child tax credit exceeds the amount of taxes owed, those parents can receive up to $1,400 as a refund.

With the Advance Child Tax Credit Program that was part of President Biden’s $1.9 Trillion economic aid package passed in March, the existing tax benefit was increased from $2,000 up to $3,600 for children under six and $3,000 for children 6 – 17 for the 2021 tax year.

In addition, instead of having to wait until filing next years’ taxes to receive the credit, parents are receiving an automatic advance of half of what they would be entitled to from July through December 2021, with the remaining balance coming in the form of a credit when their taxes are filed in 2022. 

However, not every family will qualify for the additional credit amount. In fact, a percentage of families won’t receive any credit — or monthly payment — at all. That is because the credit is gradually phased out for individuals and families with income above a certain threshold. 

This, of course, makes calculating monthly payments and the overall tax credit very tricky. 

To help make sense of things, let’s start with who qualifies. 

Who qualifies for the new child tax credit? 

In early June, the IRS rolled out an online tool called the Advance Child Tax Credit Eligibility Assistant as a way to help families determine whether they are eligible for the advanced monthly payments and if so, how much they can expect to receive. 

Parents who are married and filed a joint tax return with an adjusted gross income (AGI) of $150,000 or less in 2020 and head of household filers with an AGI less than $112,500 qualify for the maximum monthly payments this year. Additionally, single filers who earn less than $75,000 can also qualify for the whole benefit.

Parents with an AGI higher than $150,000 that file jointly or $112,500 for individuals that file head of household won’t be eligible for the full amount of the benefit but may qualify for at least a portion of it — as the credit phases out before cutting off entirely at $182,000 for joint filers,  $144,000 for those filing head of households and 107,000 for single filers.

Put simply, you will lose $50 for every $1000 over $150,000, $112,500, and $75,000, respectively.

Keep in mind that these numbers are in addition to the other child-related eligibility requirements for the child tax credit which include:

  • You must have provided at least half of the child’s support during the last year, and the child must have lived with you for at least half the year.
  • Parent and child (children) must be US citizens.
  • For married couples filing jointly, at least one spouse needs to have a Social Security Number or ITIN.
  • The child has to be 17 or younger on Dec. 31, 2021.
  • The child must have a Social Security Number

 

How will the tax credit be paid out and how much can I expect to receive? 

Let’s say you’re a married couple earning $125,000 per year with two children (ages 5 and 2). Based on the current criteria, you qualify for the maximum amount of $3,600 per child for a total of $7,200. 

 

In this case, you would receive half of that amount — $3,600 from July 15th – December 15th in monthly child tax credit payments and the remaining $3,600 as a tax credit when you file in 2022.

 

Alternatively, let’s say your combined income was the same, but your children were 8 and 12. In this instance, you would receive $3,000 for each of your children for a total of $6,000 with half of the money paid out in monthly installments of $500 issued direct deposit, paper check or debit card and the remaining balance as a tax credit — similar to the previous example.

Is there an option to opt-out? 

While most families are viewing the payments as a timely benefit, the IRS has allowed eligible taxpayers who would rather defer the full tax credit until next year the option to do just that. Parents looking to opt-out can visit the IRS’s portal to unenroll from receiving the advanced payments before July 15th. 

 

What if I don’t usually file taxes? Am I eligible to receive the advanced child tax payments? 

There are a number of families who, due to their gross income (less than $12,400 if single or $24,800 if married), don’t typically file a tax return. In this instance, the IRS created a Non-filer Sign-up Tool that allows all non-filers to sign up for the monthly advance checks by providing information about their finances, number of children, and ages. 

 

The new child tax credit rules are a little confusing but could be a good benefit for eligible families. If you have questions about the changes or need help figuring out if your family is eligible, give us a call today. We’ll walk you through it step by step and answer any questions that come up along the way. After all, we want to make sure this change benefits everyone who needs it most!

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