Since the pandemic began back in early 2020, Congress has enacted several laws to help individuals, families, and businesses recover. Many of those laws affected taxpayers’ 2020 tax returns; others will affect the 2021 returns and beyond. In this article, we are going to talk about one of the tax changes I am getting many questions about: the expanded child tax credit.
The expanded child tax credit is for 2021 only. The temporary changes are:
- The credit has increased.
- The credit is available for children who will turn age 17 in 2021.
- The credit is fully refundable for most taxpayers.
- Taxpayers can receive half of the credit in advance.
Before 2021, the credit was $2,000 per qualifying child with the refundable portion limited to $1,400. For taxpayers whose main home is in the United States or Puerto Rico, the credit is fully refundable for 2021 only. The maximum credit is $3,600 per child for children ages 5 and under at the end of 2021. For children ages 6 through 17 at the end of 2021, the credit is $3,000.
Similar to the prior child tax credit, the 2021 expanded credit has income limitations:
- For single taxpayers and married persons filing separate returns, the income threshold is $75,000 (modified adjusted gross income).
- For taxpayers filing as head of household, their modified adjusted gross income threshold is $112,500.
- The modified adjusted gross income threshold for married couples is $150,000. This threshold also applies for qualifying widows and widowers.
For each $1,000 over the threshold, the expanded child tax credit is reduced by $50.
Starting July 15 and continuing through December 2021, the Treasury department and the IRS will send monthly advance tax credit payments to eligible taxpayers for one-half of their estimated credit. The payments will be based on the taxpayers’ 2020 tax return information. If the 2020 return has not yet been filed, the payments will be based on each eligible taxpayer’s 2019 return. The monthly payments for taxpayers eligible for the full credit will be $300 for each child aged 5 and under and $250 for each child aged 6 to 17. The monthly payments will be made by direct deposit or check on the 15th on each month July through December. Taxpayers will receive the other half of the credit when they file their 2021 tax return.
A Word of Caution:
If your child will turn 6 in 2021 and you receive the monthly $300 payments (based on your child’s age on your 2020 return), your child tax credit when you file your 2021 return will be $1,200 ($3,000 less the $1,800 already received in $300 monthly payments for six months).
If your child will turn 18 in 2021 and you receive the monthly $250 payments, you will be required to pay back most of the advance credit you received. When your child turns 18, your credit drops to $500. If you received the $250 payment from July through December, you will need to return $1,000 of the $1,500 you received.
The IRS has created a special page on their website about the advance child credit payments in 2021. Online tools that will be coming soon on this page are:
- An eligibility tool to help families determine if they are eligible for the advance child tax credit payments.
- A tool to unenroll or opt out of the monthly payments.
Later in the year, according to the IRS, taxpayers will be able to check the status of the payments and update their information.
Do you have more questions about the expanded child tax credit or need help filing your taxes this year? Please reach out to me for further information. I’d love to help!Judith Ackland has more than 26 years of experience in accountancy and financial planning, including seventeen years as a CFO of a diverse business. She started Crystal Financial in 2010 to help a wide array of individuals, families, and business owners better understand their finances and how good financial management could help them achieve their goals. Judith has an MA in Professional Accountancy from the University of Nebraska at Lincoln as well as a Certified Public Accountant Certificate and a Certified Financial Planner designation.