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Family, Taxes, Government
Congress passed the $1.9 trillion American Rescue Plan in March of this year. In addition to stimulus payments, vaccination initiatives and financial relief for small businesses, the plan made significant but temporary changes to the child tax credit.
If you’re a parent or guardian, you could be eligible to receive a one-time enhanced tax credit for your child and here’s what you need to know.
What Is the Child Tax Credit?
The child tax credit is a tax credit for parents with dependent children. The credit is often linked to the number of dependent children a taxpayer has and the taxpayer's income level.
The child tax credit was available for families with children up to age 16 and was worth $2,000 per child(1) in the 2020 tax year. For 2021, eligible families may receive up to $3,600 for children ages five years and under and up to $3,000 for children ages six to seventeen(2). For this year only, children seventeen years old will also be eligible for the child tax credit.
While these are the two main shifts to the Child Tax Credit for 2021, there are several stipulations and eligibility requirements that families need to know.
Eligibility Requirements
The American Rescue Plan has changed several eligibility requirements for families, opening up the child tax credit to more parents who may have not previously qualified.
In order to be eligible, your child must:
Be claimed on your tax return
Be age 17 or younger
Be related to you
Live with you for at least six months during the year
Have a Social Security number
Be a citizen or U.S. resident alien
Reduced Amounts for High-Income Families
For 2021, not all families will be eligible to receive this additional $1,000 or $1,600 in enhanced child tax credits. Single filers with an AGI (Adjusted Gross Income) of $75,000 or joint filers with an Adjusted Gross Income of $150,000 will start to see a reduction in enhanced benefits(2).
It’s important to note that these reductions only refer to the additional amount, not the base $2,000. The enhanced credit will be reduced by $50 for every $1,000 over the AGI threshold based on filing status(2).
Advanced Payments for 2021 Child Tax Credit
The IRS is required to send out payments to qualifying families in advance. These payments will be half of the amount families are eligible to receive, and they are expected to be sent to families in six installments between July and December 2021. Much like the stimulus checks, families can expect to see these payments appear via direct deposit into their accounts or in the form of a check received through the mail.
The IRS will determine eligibility based on your 2020 tax return, or your 2019 tax return if no 2020 return is on file. If your circumstances have changed and you become eligible or ineligible for the credit, the IRS will be developing a portal that will allow you to update your information. This will be important for families who have lost income or had a baby in 2021.
Shifting Expectations For Your 2021 Tax Return
An important concept to remember is that these tax credits are essentially advanced payments on your 2021 tax return. If you normally receive a $2,500 tax return in April, you need to understand that these payments will now get paid throughout the tax year. If you use your tax return as a savings vehicle (which we do not recommend!), your 2021 tax return is likely to give you an unpleasant surprise if you don’t proactively save the tax credits you begin receiving in July.
We will share more details in the coming weeks on how the child tax credits will impact individual families on their 2021 tax return.
How To Prepare To Take Advantage of the Child Tax Credit
The essential ingredient to capturing the Child Tax Credit in 2021 is in managing your income. If you are between $150,000 and $200,000 of Adjusted Gross Income for married couples (or between $75,000 and $100,00 for single filers), it is critical to manage your income through 401(k), IRA and HSA contributions.
This is also a critical year for middle-American families to proactively tax plan, as it is one of the few years in American history when it will make sense for some married couples to file separately. And the couples who file separately will need to plan which spouse does the lion’s share of the retirement savings.
The changes to the child tax credit are temporary, but they can offer eligible families some important financial relief. If you think you may qualify, or have questions about how this shift in the tax code will affect your family, schedule a no-obligation 20-minute financial planning discussion.
Sources:
This content is developed from sources believed to be providing accurate information, and provided by Monotelo Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.