Child Tax Credit for 2021

For 2021 there are changes to the child tax credit that may help many families whereby they will receive a portion of the child tax credit this summer instead of waiting until after year-end when they would typically file their tax return. The American Rescue Plan Act (ARPA) of 2021 expands the Child Tax Credit (CTC) for the tax year 2021 only.

The expanded credit means:

• The credit amounts will increase for many taxpayers.
• The credit for qualifying children is fully refundable, which means that taxpayers can benefit from the credit even if they don’t have earned income or don’t owe any income taxes.
• The credit will include children who turn age 17 in 2021.
• Taxpayers may receive part of their credit in 2021 before filing their 2021 tax returns.

For the calendar year 2021, families claiming the CTC will receive up to $3,000 per qualifying child, if their age is between 6 and 17 as of December 31st, 2021. They can also receive $3,600 for each qualifying child that is under age 6 at the end of 2021. Under the prior law, the amount of the CTC was up to $2,000 per qualifying child under the age of 17 at the end of a given year.

The increased amounts are reduced (phased out), for incomes over $150,000 for married taxpayers filing a joint return and qualifying widows or widowers, $112,500 for heads of household, and $75,000 for all other taxpayers.

We believe that it will be important for taxpayers with children to file their 2020 tax returns as soon as possible to make sure they’re eligible for the appropriate amount of the CTC as well as any other tax credits they’re eligible for, including the Earned Income Tax Credit (EITC). Filing electronically with direct deposit also can speed refunds and future advanced CTC payments. If you have not filed your 2020 tax returns the IRS will use your 2019 tax return information to determine your eligibility.

Taxpayers that do not want to receive an advance payment of the 2021 Child Tax Credit prior to year-end will have the opportunity to decline to receive advance payments.

The IRS will be sending out letters regarding the credit to eligible taxpayers shortly, providing more information about advance payments soon.

There are some reasons that you may want to opt-out of the monthly child tax credit. For many Taxpayers the child tax credit advance may cause tax liabilities, for the following reasons:

1. If you take the child tax credit during the summer of 2021 rather than waiting until you file your 2021 tax returns you will receive monthly advance payments worth half of the total credit. That said, your credit at year-end will only be worth the remaining half of the normal credit that was not already received.
2. If your eligibility changes over the course of the year because you earn more income in 2020, you will have to pay back any overpayments when you file your 2021 tax return. Remember that those taxpayers who were unemployed because of the pandemic, or for people who get new jobs with higher income will end up with potential tax liability at year-end.
3. The child tax credit payments are different from the three stimulus payments you may have received in 2020, in that case, if your income went up in 2020 but the IRS sent you payments based on your 2019 return, you did not have to pay the funds back.

As you will be automatically enrolled in this service we advise you to seek assistance from one of our tax professionals in order to determine your specific circumstances and needs prior to just taking these payments. Instructions on how to dis-enroll from these payments will be available by the end of June 2021. Taxpayers are directed to continue to check the following website for additional information about these advanced child tax credits: www.irs.gov/childtaxcredit2021.

Keith Fischer, CPA

Tax Manager