About the Child Tax Credit and Your Advance Payments

Author : Camputaro & Associates
Jun 01, 2021

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The American Rescue Plan Act of 2021 has drastically altered the child tax credit in many ways. You’ve likely heard that families will be receiving payments from the IRS between July and December of this year. But what are these payments for, exactly? What other changes have been made to the typical child tax credit? And how will receiving those payments impact your 2021 tax return? Keep reading to get answers to these important tax questions.

Increased Tax Credit Amount

One of the major alterations on the child tax credit for 2021 is how much parents can receive for each qualifying child. Last year, taxpayers could receive up to $2,000 in tax credits for each of their dependent children. But for 2021, that amount has been increased significantly. You can now receive up to $3,600 for kids ages 6 and under, and up to $3,000 for older children.

Tax Credit for 17-Year-Olds

Another big change brought on by the American Rescue Plan is that it’s increased the age limit for qualifying children. Now, you can receive the amounts outlined above for qualifying children ages 17 and under. Previously, the child tax credit was only available for dependent children ages 16 and under.

Fully Refundable Credit

For 2021, the child tax credit will also be fully refundable. Though the previous child tax credit was $2,000, only up to $1,400 of that credit could be refunded to the taxpayer. What does this mean? Essentially, if you were not receiving a refund, you could apply the full $2,000 per child to what you would owe in taxes. However, if you were owed a refund, the IRS would only pay out up to $1,400 of that credit, effectively reducing the credit amount for those getting refunds. However, on your 2021 return, you can be refunded the full amount of the credit.

Half Paid in Advance

Arguably, the most notable alteration to the child tax credit for this tax year is that the IRS is being required to pay out half of your child tax credit between July and December of 2021. These are the monthly checks that were recently announced. The exact monthly amount you will receive will be determined based on the total child tax credit that you qualify for; that amount is calculated based on your 2020 tax returns, or your most recently filed return if you haven’t filed for 2020 yet.

Income Thresholds and Credit Phase Out

As with most tax credits, the enhanced child tax credit for 2021 does have a maximum income threshold, at which point your credit amount will be gradually reduced until it’s completely phased out. Those income thresholds are as follows:

  • Single filers: $75,000
  • Heads of household: $112,500
  • Joint filers: $150,000

If you make more than the amount listed above for your applicable filing status, for every $1,000 above that threshold, your credit will be reduced by $50 for each child. Please keep in mind though that these phase-out thresholds only apply to the enhanced child tax credit. If your income is high enough that you don’t qualify for the additional $1,000 or $1,600 (depending on your child’s age) credit, you could still qualify for the base child tax credit of $2,000 per child.

Impact on Your 2021 Tax Return

If you’re like most people, you’re probably wondering how this increase and the advance payments will impact your return. First, let’s address the increase itself. To put it very simply, the increased child tax credit will allow you to pay less in taxes or get a bigger refund when you file your return, so there’s really no downside to that change for you.

The advanced payments do alter things a little bit though. Because the IRS will calculate your child tax credit based on an earlier tax return, it is possible that you’ll be overpaid on this credit before the end of the year. If this happens, you may have to pay back a portion or all of the overpaid amount. If you are not overpaid, the credit you receive when you file your return will be reduced by whatever amount you received in advance payments.

The IRS will send out statements in January of 2022 that outline how much you were paid on your enhanced child tax credit in 2021. You’ll use this statement to reconcile how much you were paid and how much you should have actually received.

If you have questions about how the child tax credit and corresponding advanced payments will impact you, reach out to Camputaro & Associates today.

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Camputaro and Associates
Certified Public Accounting Firm
136 N. Orchard Street, Suite 8
Ormond Beach, FL 32174
(386) 255-2511