posted by: Radnor Financial Advisors
Recently, there were important changes made to the child tax credit that will benefit many taxpayers. As part of the American Rescue Plan Act that was enacted in March 2021:
The IRS will pay half the credit amount in advance monthly payments beginning July 15. Taxpayers will then claim the other half when they file their 2021 income tax return.
Though these tax changes are temporary and only apply to the 2021 tax year, they may present important cashflow and financial planning opportunities today. It is also important to note that the monthly advance of the child tax credit is a significant change. The credit is normally part of a taxpayer’s income tax return and would reduce their tax liability. The choice to have the child tax credit advanced will affect a taxpayer’s refund or amount due when they file their return. To avoid any surprises, it’s important to encourage clients to contact their CPA to discuss their situation.
The child tax credit and advance payments are based on several factors, including the age of children and income.
To qualify for the child tax credit monthly payments, a taxpayer (and their spouse if they file a joint tax return) must have:
Taxpayers can take full advantage of the credit if their income (specifically, their modified adjusted gross income) is less than $75,000 for single filers, $150,000 for married filing jointly filers and $112,500 for head of household filers. The credit begins to phase out above those thresholds.
Higher-income families (e.g., married filing jointly couples with $400,000 or less in income or other filers with $200,000 or less in income) will generally get the same credit as prior law (generally $2,000 per qualifying child) but can also have the option to receive monthly payments.
Taxpayers generally won’t need to do anything to receive any advance payments as the IRS will use the information it has on file to start issuing the payments.
PLEASE NOTE – Unlike the stimulus payments issued earlier this year and in 2020, the advance child tax credit payments will be reconciled on the 2021 return. If the credit is calculated to be less than the amount received, the excess payments will be owed back to the IRS.
Using the IRS’s child tax credit and update portal, taxpayers can update their information to reflect any new information that might impact their child tax credit amount, such as filing status or number of children. Parents may also use the online portal to elect out of the advance payments or check on the status of payments.