The American Rescue Plan passed in March introduced changes to the child tax credit that will provide more money to families this summer. The legislation increased the credit from $2,000 per child in 2020 to $3,600 per child under 6 and $3,000 per child ages 6 to 17 this year, and half of the 2021 credit will be prepaid in the form of monthly payments to families starting in July.
The IRS has a short period of time to get the systems for distributing payments up and running by the July 1 deadline. Eligibility for the credit has also been expanded, and families can check whether they qualify. Parents who earn less than $150,000 qualify for the maximum monthly payments this year.
The child tax credit typically works by lowering the amount of federal income tax parents owe by $2,000 per qualifying child. In 2021, half of the credit will be paid out via monthly payments of up to $300 per child through the end of the year. Parents can choose to opt out of the monthly payments and instead receive the benefit as a lump sum at the end of the year.
Do I qualify for the new child tax credit?
The American Rescue Plan removed the minimum earning requirements (meaning you don’t actually have to earn any income) for the 2021 child tax credit. It also lowered the income ceiling for eligibility in order to directly target families considered most in need. Because there were eligibility changes on both minimum and maximum earnings allowed to take the full benefit, all parents should check and see if the qualification changes affect their family.
Parents who are married and filed a joint tax return with an adjusted gross income (AGI) of $150,000 or less in 2020 and head of household filers with an AGI of less than $112,500 qualify for the maximum monthly payments this year. Single filers who earn less than $75,000 can also qualify for the whole benefit, but the majority of eligible single parents file as head of household.
Parents with an AGI higher than $150,000 for joint filers or $112,500 for heads of the household won’t be eligible for the entire benefit, but many will still qualify for a percentage of it. The credit phases out by $50 for every $1,000 of income over the maximum amount before fully cutting off at $170,000 for married couples and $132,000 for head-of-household parents.
How will the 2021 Child Tax Credit be paid out and how much money will my family get?
The child tax credit typically works by lowering the amount of federal income tax parents owe by $2,000 per qualifying child, which parents could either write off on their W-4 or at the end of the year on their tax return. The goal is to get more money into the hands of qualifying parents by reducing the taxes that come out of their paychecks. But because the credit is non-refundable — meaning it can only reduce your federal income tax down to zero, even if the credits add up to more than the taxes you owe — families who write off the deduction on their return just end up getting a reduction in the amount due, rather than a boost to their monthly paycheck.
The big difference in 2021 is that starting in July, half of the child tax credit will be paid out via monthly payments of up to $300 per child through the end of the year. While some media outlets have taken to calling them “monthly stimulus checks”, they’re more similar to what’s known as a child allowance or family benefits in other developed countries.
Here’s an example of how it would work: Let’s say you’re a married couple earning less than $150,000 and you have two children under the age of 6. You qualify for the maximum amount, $3,600 per child, for a total of $7,200. You’ll receive half of that — $3,600 — in monthly child tax credit payments of $600 during the second half of the year.
Alternatively, say instead you had three children ages 2, 5, and 9. In this instance, you’d get $7,200 for the younger two, and another $3,000 for the 9-year-old for a total of $10,200 with half of the money ($5,100) paid out in monthly installments of $850.
And finally, back to those previously mentioned income limits: If you and your spouse had a combined AGI of $160,000 last year and two children under 6, the credit would be reduced to $6,200 ($3,100 each) and paid out in monthly installments of $516.66.
Can I opt out of monthly payments to get a bigger tax refund? Should I?
It is possible to opt out of the monthly payments and instead receive the benefit as a lump sum at the end of the year. In an April 13 hearing with the Senate Committee on Finance, IRS Commissioner Charles Rettig assured legislators that the IRS will be setting up an online portal by July 1 where parents will be able to choose whether or not they want to participate in the monthly payments.
While some experts have predicted that ongoing child benefit payments will help lift millions of children out of poverty by providing financial assistance year-round, research from the Brookings Institute has indicated that the majority of Americans believe monthly tax refund payments to be less helpful than an annual lump sum. However, the study also showed some evidence that when respondents were given information that tied the timing of guaranteed monthly or quarterly disbursements to specific annual events that tend to be more costly, like back-to-school or Christmas shopping, interest increased.
Everyone’s situation is different, and while monthly payments may be more advisable for most, there are a few situations families could find themselves in this year that would make opting out a better decision:
- Your tax situation changed or is likely to change in 2021
The coronavirus pandemic sent the global economy into a tailspin, resulting in unprecedented high levels of unemployment in even the “safest” of industries in 2020. If you or your spouse were unemployed or had a lower salary in 2020 but have since found a higher-paying job or expect to get a raise in 2021, it might be a better choice to opt out of the monthly payments.
Here’s why: Eligibility for the 2021 child tax credit monthly payments is calculated based on people’s 2020 income tax returns. So if you’re a joint-income family that earned a combined AGI of $100,000 in 2020 due to periods of unemployment or missing tips that you once relied on, only to bounce back and make $160,000 by the end of 2021, it’s likely you’ll owe the IRS money come tax season if you take the monthly payments.
It is possible to update your new income information using the IRS web portal and avoid having to pay back taxes. But if you don’t know exactly how much money you’re going to end up making this year and your estimates are close to the eligibility limit, it might be better to take the lump sum next year instead.
- You share custody of your children
With stimulus checks, divorced or unmarried parents with joint custody could essentially “double dip” and both claim their children in order to receive a bigger payment. This is not the case with the new child tax credit and monthly payments; if both you and your child’s other parent claim the child as a dependent and get the monthly deposits, one of you could be on the line for thousands of dollars come tax season.
In order to claim your child and get the child tax credit, they need to live with you for at least six months out of the year. Even if your custody agreement is completely evenly split, one parent will technically be caring for the child one day more than the other in a 365-day calendar year — and that’s who gets to claim the credit. If you and your co-parent haven’t worked out holidays, vacations, weekends, and more for this year, it may be best to opt out of the monthly payments and wait until next tax season to determine who receives the benefit.
- You want to avoid accidental overpayments from the IRS
In order to protect low-income earners, the IRS has put out a provision that protects parents from having to pay back a portion of the payments should the tax agency accidentally send your family too much money. According to the Congressional Research Service, if an incorrect payment is “due to net changes in the number of qualifying children,” parents do not have to pay back up to $2,000 per child depending on their income and the number of children who were over-counted. However, there is still a chance that families could end up having to pay back a portion of what they were overpaid.
It’s complicated, and more of a situation that could happen rather than something that’s highly probable. Because the IRS is having to roll out a benefits delivery system in just four months, there’s a chance that the rush may cause some oversight when it comes to calculating how much money to send out.
For example, the IRS could miss that twins listed as 17 years old on a parent’s 2020 tax return turned 18 in February of this year, making them ineligible for the $3,000 credit (although they would still each qualify for a $500 credit). If that parent were to choose to take the monthly payments, they would have been overpaid around $2,000.
Again, due to the protections in place, the likelihood that this sort of overpayment would result in a typical family owing money at tax season is small. But if you have multiple children moving in and out of eligibility for different amounts, you might want to play it safe.
Does the new child tax credit mean I’ll get a bigger tax refund?
Possibly! Obviously, if you opt out of the monthly payments, then at the very least you will be able to receive that money as a lump sum come tax season. But the American Rescue Plan also made it so that this year’s child tax credit is fully refundable, meaning if the amount of credits you qualify for is more than the total income tax you owe at the end of 2021, you’ll get the remaining amount of money in your tax refund.
This is more likely to happen for low-income families, who usually end up owing less federal income tax. If a family only owes $6,000 in federal income tax this year and has two children under 6, their refund from those tax credits alone would be $1,200. On the flip side, if a family with two children under 6 would pay $20,000 in federal income tax throughout the year normally, the child tax credits will have reduced their tax burden by $7,200, but that’s still $12,800 owed in taxes, so none of the child tax credit will be refunded to them.
How many payments will there be in total in 2021?
If families choose to receive the monthly installments, overall they would get six payments in 2021, one for each month from July to December. However, once you file your 2021 taxes in 2022, any money that’s leftover if the amount of the credits exceeds your federal income tax will be included in your tax refund. That totals out to potentially seven payments from Uncle Sam over the course of the next year.
What am I allowed to do with the money?
Parents are free to use the money however they choose. While the goal is to help families cover the costs of caring for children, the child tax credit has no specific stipulations on how it can be used, making it different from welfare programs like SNAP Food Benefits (sometimes known as food stamps). There’s also no “use it or lose it” component to the credits — if you want to sock the money away into a 529 college savings account or contribute to a retirement plan for your child, that’s perfectly fine.
Can I get the child tax credit if I have a baby or adopt a child in 2021?
If you welcome a new child into your home at any time in 2021, they qualify for the tax credit. All you have to do is update your family information on the IRS’s forthcoming child tax credit web portal or notify the agency via the USPS if you do not have consistent internet access.
How long will the new child tax credit last?
Many supporters and lawmakers are pushing to make these changes permanent, and some want to go even further in restructuring how family benefits will work. But as of right now, this iteration of the child tax credit is only available in 2021.
President Biden’s trillion-dollar infrastructure plan, set to roll out in the coming week, includes a provision that would extend this year’s version of the credit through 2025 by increasing taxes on the wealthiest Americans. However, the provision is still only a four-year extension and will need to pass through both the House and Senate before it is guaranteed.
The American Rescue Plan passed in March introduced changes to the child tax credit that will provide more money to families this summer. The credit was increased from $2,000 per child in 2020 to $3,600 per child under 6 and $3,000 per child ages 6 to 17 this year, and half of the 2021 credit will be prepaid in the form of monthly payments to families starting in July.
What is the American Rescue Plan’s child tax credit increase?
Families can receive up to $3,600 per child under 6 and $3,000 per child ages 6-17.
When will families receive the increased child tax credit?
Starting in July, half of the 2021 credit will be paid out monthly to eligible families.
Who is eligible for the child tax credit?
Parents who earn less than $150,000 per year qualify for the maximum monthly payments.
How do families qualify for the child tax credit?
Families can check eligibility requirements and income limits to see if they qualify.
How does the child tax credit typically work?
The credit reduces the amount of federal income tax parents owe by $2,000 per qualifying child.
Can families opt-out of monthly child tax credit payments?
Yes, an online portal will be available by July 1 where parents can opt out of monthly payments.
How much money will eligible families receive through monthly payments?
Families can receive up to $300 per child per month through the end of the year.
Is the child tax credit refundable?
The credit is non-refundable, but half of the credit will be paid out via monthly payments in 2021.
What are the income limits for the child tax credit?
The credit phases out for joint filers with an AGI over $150,000 and heads of households over $112,500.
Will monthly child tax credit payments be helpful?
Monthly payments may be more advisable for most, but everyone’s situation is different.