Thanks to recent changes to the 2021 Child Tax Credit, many households will be getting a letter from the IRS this summer informing them that they may be receiving monthly advance Child Tax Credit payments starting in July.
What is the Child Tax Credit (CTC)?
The Child Tax Credit is simply a benefit that allows individuals to claim a credit on their tax return for every qualifying dependent child (defined as ages 17 and under). In 2020, the maximum CTC that could be claimed was $2,000 for each eligible child.
ARPA Changes to the 2021 Child Tax Credit
Under the American Rescue Plan Act (ARPA) of 2021, the CTC expanded in two significant ways:
1. Increased Credit Amount
The credit was increased to $3,000 for each qualifying child between the ages of 6 to 17, and to $3,600 for each qualifying child under the age of 6 at the end of 2021.
2. Advance Payments
Families will automatically receive advance payments of up to 50% of their estimated 2021 CTC based on information on their 2020 tax returns (or 2019 tax return if the 2020 tax return has not yet been filed). Unless an individual opts out of the payments, the advanced payments will be made regularly from July to December 2021.
How Can I Claim This Credit?
If you have already filed a 2019 or 2020 individual tax return, you automatically will be considered for the advance CTC and do not need to take additional steps.
Can I Opt Out of Receiving the Advance?
Yes, to stop advance payments you must unenroll 3 days before the first Thursday of the month by 11:59 p.m. EST using this link: https://www.irs.gov/credits-deductions/child-tax-credit-update-portal.
However, once you opt-out, you cannot opt back in. It is also important to note that the CTC would normally be claimed when filing your individual income tax return and hence would reduce your federal tax liability. If you choose to not opt out, the advance CTC will affect your 2021 refund or amount due when you file your return.
|Payment Month||Unenrollment Deadline||Payment Date|
Eligibility Restrictions of the 2021 Child Tax Credit
Despite the ARPA CTC expansion, there are some eligibility restrictions for receiving the increased CTC amounts based on adjusted gross income (AGI) and filing status.
- For taxpayers married filing jointly and widows/widowers, the increased amounts will be phased out when AGI exceeds $150,000.
- For heads of household, the phase-out begins when AGI surpasses $112,500.
- For all other taxpayers, increased CTC amounts are reduced when AGI exceeds $75,000.
The phase-out is equal to $50 for every increase in $1,000 to the taxpayer’s AGI above these limits. Taxpayers with income up to these limits are potentially eligible to receive the full amount of the increased CTC.
The regular CTC of $2,000 per child begins to phase out when 2021 AGI exceeds $400,000 for taxpayers married filing jointly or $200,000 for all other taxpayers.
Example CTC Calculation
|Child Tax Credit - 2020||Child Tax Credit - 2021|
|Married Filing Jointly Couple with AGI 145k with 2 kids (ages 4 & 8)||$2,000 + $2,000 = $4,000||$3,600 + $3,000 = $6,600|
|Married Filing Jointly Couple with AGI 155k with 2 kids (ages 4 & 8)||$2,000 + $2,000 = $4,000||$3,350 + $2,750 = $6,100|
Are you interested in chatting about how this tax credit affects you personally? Contact us to be connected with an advisor that will tailor advice to your circumstances.