What You Need to Know About the Expanded Child Tax Credit for 2021

Under previous law, if you were eligible for the Child Tax Credit (CTC), you could get up to $2,000 per qualifying child that was age 16 and under as of the end of the year. The American Rescue Plan Act expands the CTC for just the 2021 tax year.  Now, families can receive either of the following:

• Up to $3,000 per qualifying child that is between the ages of 6 and 17 as of December 31, 2021 (17 year olds are now included!), or

• Up to $3,600 per qualifying child that is under age 6 as of December 31, 2021

This means you could potentially get an additional $1,000 to $1,600 per child!

Of course, as with any type of tax credit, how much you are eligible to receive depends on your income for that year. Once your income is over $150,000 (married filing jointly), $112,500 (heads of household), and $75,000 (all other taxpayers), the amount of the credit you can receive is phased out and reduced.

Normally, a 2021 tax credit is claimed and received as part of your 2021 tax return. However, you will have two options for receiving the payments for the 2021 CTC:

• Option #1:  The IRS will be making monthly advance payments from July through December to eligible people, up to 50% of the total amount of the credit. You will then receive the remaining 50% with your 2021 tax return in April 2022. The advance payment is essentially a prepayment of the tax credit you would usually get with your tax return.  These payments will be estimated based on your 2020 tax returns (or 2019, if 2020 was not yet filed or processed). 

For example, say you have a 5 year old child and make $60,000. You would be eligible for a $3,600 CTC for 2021. From July to December, you will receive monthly payments of $300 ($300 x 6 months = $1,800 in total) and you will receive the remaining $1,800 with your tax return in April 2022.

• Option #2: You can opt out of receiving advance payments under option #1 and receive 100% of the amount with your tax return in April 2022. 

Tax credits reduce any taxes you owe on a dollar for dollar basis. They can also be refundable or nonrefundable. Refundable tax credits can be used to offset any taxes due and any excess will result in a tax refund to you. Nonrefundable tax credits are only available to reduce any taxes due and will not result in a refund. For instance, if you owed total taxes of $2,000 and had a refundable tax credit of $3,000, you would get a tax refund of $1,000. However, if the tax credit was nonrefundable, it would only be used to offset the $2,000 of taxes owed and you would not receive a refund.

The CTC is a fully refundable tax credit only in 2021, meaning that even if you do not earn any income or do not owe any taxes for 2021, you are still eligible to receive the money. So if the CTC is larger than your tax bill, you can receive the excess amount as a tax refund. The CTC is normally only partially refundable up to $1,400 and this will apply again in 2022 and beyond unless the law is changed so make sure to get your money in 2021.

If you have other dependents such as children ages 18 and over, dependent parents or qualifying relatives, while these do not qualify you for the CTC, you may be able to claim another credit, the Credit for Other Dependents, on your 2021 tax return. This can be up to $500 per dependent, depending on your income level.

If you have children, make sure to file your 2020 tax return as soon as possible to make sure you are eligible for the right amount of CTC as well as any other tax credits. If you have already filed your 2020 tax return, you do not need to do anything further. The IRS expects to launch an online portal specifically for the child tax credit. You will have the chance to update information on changes to your income, filing status, and the number of qualifying children as well as opt out of the advance payments.

Stay tuned for more details to be announced soon from the IRS on these payments!