As part of the American Rescue Plan Act, the Child Tax Credit has been expanded for tax year 2021 only. Here are the key features:
- Child Tax Credit is larger for most taxpayers
- Children who turn 17 in 2021 are included
- The tax credit is fully refundable
- Half of the credit will be paid during the year and half will be claimed on the 2021 tax return
For tax year 2021, the child tax credit has been increased to $3,000 per child between the ages of 6 and 17, and $3,600 per child 5 years old and younger. The new tax credit is also fully refundable. This means that taxpayers can receive the full amount even if they have no income or do not owe any income taxes. Under prior law the child tax credit was $2,000 per child, limited to children 16 or younger, and only $1,400 of the credit was refundable.
One of the defining features of the expanded child tax credit is the advanced payment. The tax credit will be split: half coming with the tax refund next year, while the other half will be divided into equal payments from July to December of 2021. That means families will receive $300/mo per child under age 6 and $250/mo per child ages 6-17 through the second half of the year. Additionally, families would then receive the remaining credit as a tax refund when they file their tax return. For example, a typical family of four would receive a $6,000 child tax credit. They would receive $500/mo from July through December and then receive a $3,000 credit on their tax return next year.
The increased child tax credit amounts are reduced for incomes over $150,000 for married taxpayers filing a joint return, $112,500 for heads of household, and $75,000 for all other taxpayers. See the link below for a 2021 child tax credit calculator. You can enter your information to estimate the amount of your credit and any reduction if applicable. The IRS will use information from your most recent tax return to calculate your tax credit. The IRS plans to establish an online portal by July 1st to allow taxpayers to update information and even decline the advanced payments. This would be helpful if you have a change in income (up or down) or if you had a baby in 2021.
As always, we are available to answer questions or discuss in more detail how this change might affect you and your family.