2021 Child Tax Credit
Thanks to the American Resucue Plan Act of 2021, many families are about to receive a nice tax benefit with the new child tax credit rules for 2021. It is now the highest it has ever been in histroy which will hopefully help families that have struggled during the COVID-19 pandemic. However, like most things tax-related, the rules are complex with several exceptions. The amount of the credit will depend on the income level of the family and age of the children.
What Are The Old Rules?
The 2020 child tax credit was $2,000 per child under the age of 17 claimed on your tax return. This credit began to phase out at an adjusted gross income (AGI) level above $400,000 for married filing joint and $200,000 for single filers. Additionally, a $500 other dependent credit was allowed for dependents over the age of 17.
2021 Rules
The credit has increased to $3,000 per child between the ages of 6 and 17 and $3,600 per child who is under age 6. The credit is fully refundable and it requires half of the credit to be paid in advance by having the IRS distribute monthly installments to qualifying families from July 2021 to December 2021. The IRS will base the eligibility and payments based on the income level showing on previous tax returns. If a 2020 return has not been filed yet, they will look at 2019.
Keep in mind that this credit begins to phase out at AGI’s of $75,000 for single filers, $122,500 for head-of-household filers and $150,000 for married filling joint. Depending on the ages of your children, that could mean $300 a month for each child 5 years old or younger and $250 per month for each kid between the ages of 6 and 17.
If you would rather receive your child tax credit payments in one lump sum rather than seven smaller payments, you can choose to opt out of the payments in July using the IRS portal that will be released early in the summer. It will be interesting to see how smoothly the process will go with issuing advanced child tax credit payments for the first time and the adjustments that may have to be made when filing 2021 tax returns.
