Every year, millions of families benefit from the child tax credit. This year, the American Rescue Plan has expanded that credit. Families may see a check arrive in their accounts in July.
This is good news for most recipients, but it can also bring some worries. Will you qualify for this payment? Is it welfare? Will it affect your taxes next spring? Before the checks hit, you need to know what they mean for you.
What Is the 2021 Child Tax Credit?
First of all, the child tax credit is not a welfare payment. It’s a tax credit, which means it reduces your tax burden. Unlike a tax deduction, it doesn’t just reduce your taxable income, but comes out of your total tax liability for the year. And, unlike many tax credits, it’s fully refundable. That means that if the tax credit is greater than your total tax bill, you can receive the difference as a refund.
This year, half of that refund will be paid in advance. Monthly payments start July 15th. The IRS will calculate what you should receive and send the money by check, debit card, or direct deposit. If you would rather receive that money after filing next year, you can opt out on an online portal the IRS intends to set up soon.
It feels strange to many families to receive “free money” from the government throughout the year. But remember: that money is your own tax money; it’s just refunded to you sooner than usual.
Most American households with children will qualify. The full amount will go to single filers making up to $75,000 annually, heads of household making up to $112,500, and joint filers making up to $150,000. Households making over these limits will receive a phased-out amount. The IRS uses your 2020 tax filing to determine your income level.
Unlike most years, families who don’t earn enough to need to file can still qualify. If you haven’t filed taxes because of low income, you should file as soon as possible.
You will receive a payment for each child. The rules about which children qualify are similar to the rules every year:
- The child must live with you at least half the year and you provide at least half of their support.
- The child must be a US citizen and have a social security number.
- If you share custody with another parent, only one of you may claim the child tax credit.
- Children born or adopted during 2021 qualify for the entire year.
- In a change from the usual rules, children who turn 17 during 2021 still qualify.
The credit for each child ages 6-17 is $3000 for the year— $3600 for each child under 6. Each monthly payment you’ll receive from July 15 to December 15 equals one-twelfth of the total refund the IRS expects to owe you. You will receive six of these payments during the year, and the other half of your refund when you file in spring 2022.
What Does This Mean for Your Taxes?
Some parents fear they will receive too much throughout the year and end up owing money. If your income substantially rises during 2021, that could happen. Since your eligibility is determined based on your 2020 tax filing, changes to your finances in 2021 could mean you aren’t eligible after all. Likewise, if you had a child this year or lost income, you may not receive as much as you should.
Luckily, you can update your income and other important information with the IRS through its online portal. This portal will open by July 1st. If you expect your tax status to be significantly different than it was in 2020, you should update that information right away.
If you’re unsure what will happen this year, or if you’d rather receive your tax refund as a lump sum next April, you can opt out of advance payments entirely using the same portal.
Plan for Your 2021 Taxes Today
Should you opt out of advance payments for a bigger refund next spring? Can you plan for more deductions and a lower tax burden? What will you do with the extra money in your budget? A financial advisor can help you plan for your taxes long before it’s time to file. Contact us to be connected with a qualified expert today.