The American Rescue Plan Act of 2021 significantly changed the Child Tax Credit for the 2021 tax year. Let's take a deeper dive into those changes and pull out decision points for you (if you have children, obviously).
Expanding tax credit amount
Change in income restrictions
Monthly payment or annual credit
Allowances for overpayment
Age expansion
This information is not meant to be taken as tax advice. Please consult your tax professional for advice specific to your tax situation.
Section 1: Expanding Tax Credit Amount
In 2020, the child tax credit was $2000 per child. If you owed taxes, you would receive the entire $2000 per child if you were within the income limits and owed taxes. If you did not owe taxes, then you could get up to $1400 per child through the Additional Child Tax Credit (Form 8812).
The 2021 American Rescue Plan Act changes the details considerably. For 2021, the child tax credit expands to $3600 for children under 6 years old and $3000 for children 6 and older. If you are getting a refund, the amount you get from this child tax credit does not change.
That's a $1000-$1600 increase per child!
Section 2: Change in Income Restrictions
Under the 2020 laws, the Child Tax Credit started to phase out for incomes over $200,000 for a single return and $400,000 for a joint return. More importantly, you needed an earned income of at least $2500 to qualify for and obtain the Child Tax Credit.
These rules have been changed through 2021, unless they're extended by another bill. For 2021 only, those with incomes from $0 to $75,000 (single) or $150,000 (joint) can claim the full Child Tax Credit. If your income is higher than those income caps, the older 2020 rules apply.
Section 3: Monthly Payment or Annual Credit
From July 2021 to December 2021, the IRS will issue monthly payments of $300 (for children under 6) or $250 (for children 6 through 17) to parents for each child under their care. You can opt out of this if you'd like.
Decision point: You can get your Child Tax Credit early through this monthly payment. However, be warned that this is a pre-payment of a tax credit. If you find that you usually break close to even on your taxes or you owe taxes, think twice before accepting this early Child Tax Credit monthly payment. If you get a sizable refund come tax time, then there shouldn't be much of a problem receiving this monthly payment.
We're still debating whether to accept the monthly Child Tax Credit or not. I'm more conservative with our finances than my husband. He sees no issue in accepting it. I think we'll have a giant tax bill (as we're both self-employed and tend to owe taxes).
Sometime before July, the IRS will release a mechanism for opting OUT of the monthly Child Tax Credit payments. That's not yet been released, but we'll let you know when it has. Subscribe to this blog to be one of the first to know!
Section 4: Allowances for Overpayment
Let's say you get the monthly Child Tax Credit payment for your twin 17 year olds, turning 18 in August. You get $3000 for the two of them from July through December. That's more than you should receive come tax time in April 2022.
You owe none of it back. That's right. If the government somehow overpays you, which is not outside the realm of possibility, then you don't have to pay it back. That's part of this tax code change for 2021 only.
Section 5: Age Expansion
You might have noticed by now if you have older teens, but the age restrictions changed. In 2020, the Child Tax Credit covered children age 0 through 16. Children age 17 did not count, as if they stopped eating you out of house and home at age 17.
This year, and this year only, children age 17 are also covered by the Child Tax Credit.
The American Rescue Plan Act of 2021 aimed to decrease childhood poverty and seems to be doing a pretty good job of it. I, for one, am happy with some of the temporary good this act is providing our communities.
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