What is the expanded child tax credit?
The enhanced child tax credit was part of the American Rescue Plan signed by the President back in March of this year. The credit is part of the government effort to help families navigate the ongoing challenges of the pandemic. For tax year 2021, the maximum credit is $3,600 for each qualifying child younger than age 6 and $3,000 for children between ages 6 and 17 at the end of 2021. Half of the credit will be distributed as an advance on 2021 taxes in six monthly installments. For a household that qualifies for the full benefit, this translates into payments of $300 per month for children under the age of 6 and $250 per month for those between the ages of 6 and 17.1
Who qualifies?
The IRS has started sending letters to more than 36 million American families who may be eligible to receive monthly Child Tax Credit payments starting in July.2 The maximum credit is available to married couples with children who files taxes jointly and have an adjusted gross income less than $150,000. For those individuals with children that file their taxes as single, the full credit is available to those that have an adjusted gross income less than $75,000. The enhanced credit phases out for taxpayers who make more money and is not available to individuals earning more than $95,000 and married couples earning $170,000 who file jointly. Taxpayers who make more than these amounts will still be eligible for the regular child tax credit which is $2,000 per child under age 17 for those that are married and filing a joint return with a modified AGI less than $400,000 as well as those that file under the other filing statuses with a modified AGI less than $200,000.
Are they new?
While these are the first ever monthly cash payments of the child tax credit, many families have received child tax credits for years. A few things that have changed for this year are the amount per child, the number of people who qualify, and the way it is paid out.
An underappreciated stimulus?
According to a research note published by Cowen analysts, these child tax credit payments are an “underappreciated stimulus” that could lift sales across the retail, restaurant, and travel industries.3 These analysts predict that the extra dollars will translate into more spending by consumers across a variety of sectors. Also, they expect that the increased spending won’t just be limited to typical family spending categories, but may also “spillover” into adult categories like beer and plane tickets as parents spend some of the tax credit dollars on themselves.
Do I have to accept the Child Tax Credit Payments?
Many families across the country will gladly accept the monthly payments as they seek immediate relief from some of the financial challenges they have faced throughout the global pandemic. However, for some taxpayers, it may make sense to unenroll from the advance payments. One reason you may want to opt out of the monthly payments is if you expect to earn significantly more in 2021 than you did in 2020. Because the IRS will use your 2020 or 2019 tax return (whichever was most recently filed with the IRS) to determine your eligibility, you could end up receiving credit payments that you may no longer qualify for. These taxpayers will have to report the excess child tax credit amount received on their tax return which may reduce their refund or increase the amount of taxes they owe. Another reason for potentially opting out of the payments is that many people use their tax refund to cover vacations or other large purchases. Since the monthly child tax credit is a prepayment of your full 2021 child tax credit, some taxpayers prefer to receive the entire tax credit at once to get a larger refund or to lower a tax bill they suspect they will owe.
What do I need to do on my end?
To receive the enhanced child tax credit payments, most families who have filed their taxes do not have to do anything. However, some families, like those who don’t traditionally file taxes because of their income, are recommended to take additional actions to ensure they get the full amount they’re entitled to. The IRS has created a Child Tax Credit Update Portal where families can see if they’re signed up for direct deposit, change the account the money will go to, and unenroll in the advance payments if they choose to. Taxpayers can learn more by accessing the portal here: https://www.irs.gov/credits-deductions/child-tax-credit-update-portal .
1. https://www.irs.gov/credits-deductions/2021-child-tax-credit-and-advance-child-tax-credit-payments-topic-c-calculation-of-the-2021-child-tax-credit
2. https://www.irs.gov/newsroom/irs-sending-letters-to-more-than-36-million-families-who-may-qualify-for-monthly-child-tax-credits-payments-start-july-15
3. https://www.cnbc.com/2021/07/13/four-takeaways-as-child-tax-credit-kicks-off-this-month.html