With so many changes happening around us — school winding down, warmer temps, the ability to travel and see friends — one change that we’re keeping an eye on closely here at Lighthouse Financial Advisors are the changes to the Child Tax Credit (CTC). For 2021 only, the CTC will be expanded by the IRS under the American Rescue Plan Act (ARPA) of 2021 and will start to process advanced payments to qualified families with dependents.
What is the CTC? In simplest terms a child tax credit is meant to financially help families with the high costs of raising a family.
Who qualifies for the credit?
- For tax year 2021, families claiming the CTC will receive up to $3,000 per qualifying child between the ages of 6 and 17 at the end of 2021. They will receive $3,600 per qualifying child under age 6 at the end of 2021. (Previously, the CTC amount was up to $2,000 per qualifying child under the age of 17 at year’s end.)
- Single filers with an adjusted gross income (AGI) of $75,000 or less are eligible to receive the full credit. Those with an AGI between $75,000 and $147,000 (for children under 6) and $75,000 and $135,000 (for children between 6 and 17) are eligible for a partial
- The increased amounts are reduced and phased out 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.
What does this mean?
- Many taxpayers will receive an increase in the benefit of the Child Tax Credit.
- The credit for qualifying children is fully refundable, meaning taxpayers can benefit from the credit even if they don’t have earned income or don’t owe any income taxes.
- I.E. Before this change, certain low-income Individuals could only receive up to $1,400 per child as a refund, instead of the full $2,000 child credit, if their child credit was more than the taxes they otherwise owed. Under the new rules for 2021, people who qualify for a child tax credit can receive the full credit as a refund, even if they have no tax liability.
- The credit will include children who turn age 17 in 2021.
- Taxpayers may receive part of their credit in 2021 before filing their 2021 tax return in the form of monthly advances.
When Do the Monthly Advances begin?
- According to the IRS, the first payments will begin being sent to qualified recipients starting July 15th. According to WSJ, an estimated 39 million households will receive the monthly payments. It is expected that 50% of the payment amount will be sent at first, based on information gathered from the recipient’s previous tax returns.
- E. July through December families will receive 1/12th of their child tax credit they’re due (based off of 2020 AGI) each month via direct deposit or in the form of a check.
- When you (or LFA) file your 2021 Income Tax Return you will need to report the total amounts received in monthly CTC advancements
- You will then (if still eligible) receive the final ½ of your CTC when you/we file your return.
I think I qualify, what should I do?
- Eligible taxpayers do not need to take any action now other than to file their 2020 tax return if they have not yet already done so.
- LFA HIGHLY recommends keeping a log of any and all benefits received throughout the year (July thru December).
- Eligible taxpayers who do not want to receive advance payment of the 2021 Child Tax Credit do have the chance to opt-out of advance payments, instead choosing to receive it as a lump sum next year. The IRS will be announcing more information and steps on what taxpayers can do to update their information to ensure proper compliance with the rules by July 1st.
If you’re interested in calculating the monthly amount you’re eligible to receive starting on July 15th please never hesitate to reach out to anyone here at LFA.