If you have a child, you might get some money this year from the IRS. The American Rescue Plan Act that was signed into law on March 10, 2021 increases the child tax credit and calls for payments to be sent to families. The child tax credit 2021 payments are completely separate from the stimulus checks.
Here are eight things to know about the new child tax credit.
1) What is the Child Tax Credit for 2021?
The new law increases the child tax credit for 2021 to:
- $3,000 for each qualifying child aged 6 through 17 (previously $2,000)
- $3,600 for each qualifying child under the age of 6 (previously $2,000).
Keep in mind, this is a tax credit for each qualifying child. If you have two eligible children, you get twice the amount.
2) What is the Child Tax Credit eligibility?
To receive the full 2021 credit, your modified adjusted gross income needs to be equal to or below:
- $150,000 for married filing jointly
- $112,500 for head of household filers
- $75,000 for single and married filing separately filers.
If your income exceeds these amounts, the increase ($1,000 or $1,600) is reduced by $50 for each additional $1,000 in income.
If your child is between 6 and 17 years old, you only get the regular $2,000 child tax credit if your income is between:
- $170,000 and $400,000 for married filing jointly
- $95,000 and $200,000 for single and married filing separate filers.
If your child is under 6 years old, you only get the regular $2,000 child tax credit if your income is between:
- $182,000 and $400,000 for married filing jointly
- $107,000 and 200,000 for single and married filing separate filers.
The other general rules for child tax credits still apply. The child needs to have a social security number, and must be a U.S. citizen, national or resident alien. You must have provided at least half of the child’s support during the last year. Also the child must be related to you and must have lived with you for at least half the year (there are some exceptions to this rule).
3) When will you get the tax credit payments?
In prior years, you receive the child tax credit when you file your tax returns.
With the new law, eligible households will receive half of the child credit 2021 in advance. The plan is for the IRS to send eligible households monthly payments from July to December 2021. It’s not clear yet whether the IRS can meet this goal. It’s possible that payments will be made monthly, quarterly, or through a one-time payment in 2021.
If your child is between 6 to 17 years old, you might get a check or a direct deposit of $250 per month starting July (for a total of $1,500 in 2021). Then you’ll get the remaining $1,500 in tax credits when you file your tax return in 2022.
If your child is under 6 years old, you might get a check or a direct deposit of $300 per month starting July (for a total of $1,800 in 2021). Then you’ll get the remaining $1,800 in tax credits when you file your tax return in 2022.
4) What do you need to do to get the 2021 child tax credit?
If you have filed either your 2019 or 2020 tax return and you qualify, you should get half of the credit during the second half of 2021.
If you do not qualify based on your 2019 tax returns, but qualify based on your 2020 situation, you may want to file your 2020 tax returns before July. The IRS will first look at your 2020 tax return. If you have not filed your 2020 tax return, it will look to your 2019 tax return.
If your child was born in 2021, the IRS will not know about your child. But you can tell the IRS that you have a newborn by inputting this information in a new IRS web portal, which reportedly will be available middle of the year. This is if you qualify and if you’d like to receive some of the child tax credit in 2021. If you decide not to do this, you should still get the full tax credit when you file your taxes in 2022, if you qualify.
5) Are these payments taxable?
No, the 2021 child tax credit is not considered as taxable income.
6) Is this a one-time credit?
The increase in child tax credit is a one-time thing, for now. The administration’s proposed infrastructure bill contains a provision that will make this new tax credit permanent. If you support making the 2021 child tax credit permanent, contact your House or Senate representative.
7) What happens if your 2020 income qualifies you for the child tax credit, but your 2021 income doesn’t?
Excellent question. The IRS currently does not have any guidance on this. If I were to guess, if you qualify for the child tax credit based on your 2020 tax return, you will likely get the advance payments in the second half of 2021. And when you file your 2021 tax return in 2022, assuming your 2021 income doesn’t qualify you for the extended child credit but still qualifies you for the regular $2,000 tax credit, then you could likely claim the regular $2,000 per child, less the amount of any advance payments you got.
If you’re not sure if you qualify based on income or marital status changes in 2021, to save you the headache, you can elect not to receive advance payments once the IRS online portal is up. You can just settle the exact credits you may be entitled to when you file your 2021 tax return in 2022.
8) If your son turns 17 years old in 2021, do you qualify for the child tax credit?
Yes, assuming you meet all the eligibility rules. The new law increased the child tax credit age limit from 16 to 17 years old to qualify for 2021.
Some additional Child Tax Credit questions that people have asked:
Is it better to opt out of the child tax credit?
Opting out may make sense for those that will have income increases that bump them above the eligibility limit in 2021 and who don’t need the money immediately. If you opt-out but end up being eligible, you’ll receive your payments in 2022 as the full child tax credit when you file your 2021 taxes.
The IRS portal to unenroll is now live if you do want to unenroll.
- The first opt out period has now passed. However, if you want to stop future advanced payments, you must use the online portal to unenroll three days before the first Thursday of the next month.
- If you want to check your eligibility, the new portal has additional features that allow families to check their eligibility, view the upcoming payments and the timings of the payments.
- Opting out is a one-time action. Once you unenroll then you cannot enroll again if you change your mind.
Do both parents need to opt out of the child tax credit payments?
Yes. For parents who are married and filing jointly, both spouses must unenroll if you want to opt-out of the payments.
What are the deadlines to unenroll from the Child Tax Credit monthly payments?
- July: Unenrollment deadline is June 28 with a payment date of July 15
- August: Unenrollment deadline is Aug. 2 with a payment date of Aug. 13
- September: Unenrollment deadline is Aug. 30 with a payment date of Sept. 15
- October: Unenrollment deadline is Oct. 4 with a payment date of Oct. 15
- November: Unenrollment deadline is Nov. 1 with a payment date of Nov. 15
- December: Unenrollment deadline is Nov. 29 with a payment date of Dec. 15
What is Schedule 8812?
In addition to the nonrefundable Child Tax Credit and Credit for Other Dependents, you may be able to claim a refundable additional child tax credit on Schedule 8812. To do this, you will first complete the Child Tax Credit and Credit for Other Dependents Worksheet that applies to you on Form 1040.
If you qualify for the Additional Child Tax Credit then you will complete a Schedule 8812 and attach it to your Form 1040. It is considered a refundable credit which means that qualifying taxpayers can claim a refunded amount of the child tax credit even if it exceeds their tax liability after factoring in the child tax credit. The intent is to help parents with the cost of raising children.
Speak to a financial advisor about the Child Tax Credit 2021
If you’d like expert guidance on how the child tax credit 2021 might apply to your household, or you’re interested in lowering your taxes and helping to pay for your child’s college education, feel free to schedule a FREE 30 minute discovery call with one of District Capital’s personal financial planner
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.