President Biden signed the $1.9 billion American Rescue Plan back in March, but parents have had to wait four months for one of its most important provisions — the re-engineered Child Tax Credit — to take effect.
Beginning this month — direct deposits are slated to begin July 15th — eligible households will start receiving part of their 2021 child credit in the form of monthly payments, rather than waiting until next year’s tax filing season. Parents are also getting a bigger break this year, so even if you don’t need the money for rent or groceries, it’s a good way to tackle your long-term financial needs.
For example, families can use the advance payments to pay down debt, fuel their retirement savings, or bulk up their emergency fund, says Charles Thomas, founder of the Intrepid Eagle Finance, a fee-only virtual advisory in Clover, South Carolina. Those extra payments this year also might be a good opportunity to bolster your child’s 529 account, as far away as college might seem. “Whatever your family saves has a chance to grow and compound before move-in day at the dorm,” Thomas says.
As exciting as the larger Child Tax Credit is for working parents, the numerous changes this year are creating plenty of confusion, too. To offer some clarity, here are some of the aspects of the 2021 Child Tax Credit you’ll want to know.
1. Child Tax Credit Payments Start July 15th
Unlike years past, you won’t have to wait until you complete your 2021 tax return next spring to get the Child Tax Credit. Half that amount will be sent to parents in the form of monthly payments from July to December, unless you opt to wait and get the whole thing when you do your taxes next spring. So a family that qualifies for a $3,000 credit can expect monthly checks of $250 ($1,500 ÷ 6 months) for the remainder of 2021.
The IRS says payments will go out on the 15th of the month, starting in July (for August, they’re scheduled to go out on the 13th, which is a Friday).
Not sure if you’re enrolled in the advance payment program? You can check your status by visiting the Child Tax Credit Update Portal.
2. Parents Will Get a Bigger Break This Year
In the past, parents received a tax credit of up to $2,000 for each eligible child. But the American Rescue Plan bulked those up significantly. Now, parents get a credit of as much as $3,000 for children ages 6 to 17 at the end of 2021, and up to $3,600 for children under age 6.
3. You May Need a 2019 or 2020 Tax Return to Qualify
The amount of your credit depends on income, so you need to have filed a 2019 or 2020 tax return to claim the Child Tax Credit or used the IRS non-filers payment information tool to receive a stimulus check last year.
What if you haven’t taken either of those steps already? You should use the IRS’s new Non-Filer tool, which enables you to file a simplified 2020 tax return so you can qualify for the credit.
4. The Child Tax Credit is Fully Refundable
For the 2021 tax year, the Child Tax Credit is 100% refundable. That means a parent expecting a $3,600 credit but only owes $2,000 in tax for the year will still get the $1,600 difference as a refund. That’s good news for lower-income households, in particular, who typically have a relatively low tax liability.
5. Children up to Age 18 Are Now Eligible
The American Rescue Plan increased the eligibility age from children under age 17 to those under age 18. So as long as your dependent hasn’t turned 18 by January 1, 2022, you’re eligible to get the credit. (You also have to meet income requirements and live in the U.S. for more than half the year to qualify).
If your child was born at any time during 2021, you can also snag this tax break. However, you may have to wait until you file your 2021 tax return to get it.
6. The Size of Your Credit Depends on Your Income.
The beefed-up tax credit is designed as a way to support low- and middle-class families, so you won’t get the full credit — or possibly any of it — if your adjusted gross income (AGI) exceeds certain thresholds.
For 2021, the Child Tax Credit phases out in two steps based on what you earn, so things get a little confusing. The first phaseout gradually reduces the credit down to $2,000 per child if your modified AGI in 2021 is greater than:
- $150,000 for joint filers
- $112,500 for those filing as “head of household” or
- $75,000 for single filers or couples filing a separate return.
For each $1,000 of modified AGI in excess of those thresholds, your credit goes down by $50.
The credit won’t drop below $2,000 unless your modified AGI exceeds $400,000 for married couples filing a joint return or $200,000 for all other filers. This second phaseout again reduces your credit by $50 for every $1,000 you make above and beyond those limits. (L1, Question C5)
7. Some Parents Might Want to Opt-Out.
Eligible families will automatically receive the advance credit payments starting this month. But you have the ability to opt-out and receive 100% of the credit when you do your 2021 taxes.
There are a few cases where holding off might make more sense. For example, if your income—and, therefore, your tax bill—is going to be higher in 2021, getting advance payments could lead to you owing the IRS next spring.
Ditto if you’re self-employed and typically pay your income taxes in installments. “For some, this could be a way to pay a lower amount for their quarterly estimates the rest of this year and avoid it altogether,” says Thomas.
Another scenario where opting out might be a good idea is if you plan to use the credit for a one-time purchase, like a car or a vacation, according to Rick Kahler, a fee-based advisor in Rapid City, South Dakota. “It is important that each family carefully assess whether it’s best to take the monthly payments or opt-out and wait until they file their taxes,” says Kahler.
The IRS gives you a couple of weeks before each payment date to opt-out, which you can do through the Child Tax Credit Update Portal. Even if you missed the deadline for July’s disbursement, you can still do so for the remaining deposits.