Child Tax Credit – What’s Changing in 2021
The Child Tax Credit (CTC) was changed for 2021 tax year and the Wealthquest tax department would like to proactively communicate these changes to you—especially as many of you have begun receiving informational letters in the mail from the IRS addressing this topic.
In brief, The American Rescue Plan, signed into law in March 2021, temporarily altered the CTC dollar amount, age criteria, and timing of payment benefit. The legislation was created as a government financial stimulus to benefit families negatively impacted by COVID-19. This legislation applies to tax year 2021 only (beginning in 2022 the CTC is slated to revert back to prior law). The below communication will briefly explain changes taking effect this month, including a new opt-out feature that taxpayers should become familiar with now.
The Child Tax Credit in 2021
The amount of the 2021 credit was expanded from a maximum of $2,000/child up to $3,600/child for children under age 6, and $3,000 for children aged 6-17 (previously the upper age limit was 16, for 2021 it is 17). The expanded credit will be calculated on your 2021 individual income tax return. But importantly, the legislation directs the IRS to make advance monthly payments, from July 2021 – December 2021, equal to 50% of your 2021 estimated child tax credit.
For example, if a taxpayer is expected to be eligible for the maximum $3,600 credit, they would receive $300 payments each month from July through December, and then the remaining $1,800 upon filing of taxpayer’s 2021 federal tax return in winter/spring 2022.
The additional 2021 credit amounts ($1,600 for ages 0-5 and $1,000 ages 6-17) only apply to taxpayers with modified Adjusted Gross Income of $150,000 or less (Married Joint filers) or $75,000 or less (Single filers). In alignment with prior law, the original $2,000 portion of the credit will continue to phase out for taxpayers at the greater AGI limits of $400,000 (Married Joint) or $200,000 (Single).
The legislation requires the IRS to issue advance monthly payments by default. This may be problematic if your 2021 income is greater than the phaseout ranges. If so, you may have to pay back a portion of the credit come tax time in April 2022.
Should you opt out of the Child Tax Credit?
Therefore, if you know your 2021 income will be above the phaseout range ($150,000 for Married Filing Jointly or $75,000 for Single) or if you wish to avoid a potential tax bill related to the advanced credit, it may be advisable to opt out of the advance monthly payments by unenrolling at www.irs.gov/childtaxcredit2021. Unenrolling does not make you ineligible for the credit — you will still receive the credit available to you on your tax return. Unenrolling simply prevents the advance monthly payment of the credit (and the potential that you then need to repay any excess credit you received in advance).
Finally, if you are interested in educating yourself further on this topic, we recommend browsing the new White House website developed to explain this topic: https://www.whitehouse.gov/child-tax-credit/
As always, please do not hesitate to contact your individual tax advisor if you have any questions regarding the credit changes or whether you should opt out of the advance payments. We are happy to help!
Wealthquest Tax Department
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