How the Advanced Child Tax Credit Payments Impact Your 2021 Return

Additional child tax credit handwritten beside stacks of coinsBy now you’ve probably heard that the federal government will be sending out monthly checks to most parents in the country. But contrary to what many people might believe, these checks are not another round of COVID relief—at least, not exactly. These payments are an advance on an expanded child tax credit. While the credit was expanded as part of the American Rescue Plan Act to help with financial recovery from the pandemic, the child tax credit itself has been around a long time. Here’s what you need to know.

How Is This Year’s Credit Different?

While receiving checks is obviously a large change to any normal tax credit, it’s not the only difference in the child tax credit for 2021. Here are the 4 most significant changes that you should know about:

  1. Increased credit amount – The child tax credit amount for 2020 was $2,000 for each qualifying child. For 2021, you can receive up to $3,600 for kids ages 6 and under, or up to $3,000 for older children.
  2. Credit for 17-year-olds – Previously, the child tax credit ended when your child turned 17. But this year, you can receive the increased credit amount for all children ages 17 and under.
  3. Fully refundable credit – This year’s tax credit is also fully refundable, whereas you could only be refunded up to $1,400 on the old child tax credit. This meant that taxes you owed could be reduced by up to $2,000 through the child tax credit, but if you were receiving a refund, your credit was effectively reduced by $600. This year, you can be refunded the full credit amount for which you qualify.
  4. Advance payments – And, of course, getting a portion of your tax credit in advance is a major change. Specifically, the IRS is paying out half of your total child tax credit in monthly checks between July and December this year.

With these 4 changes, most families will see a significant increase in their tax credits. This could provide some essential relief for parents that had to leave work or pay for more childcare during the pandemic and school closures.

How Is My Check Amount Calculated?

Most families will receive between $200 and $300 each month for each of their children. The exact amount you receive will be based on information that you provided on your 2020 tax return (or on your 2019 return, if you haven’t filed for 2020 just yet). This includes the number of children you have, their ages, and your income.

Like most tax credits, the enhanced child tax credit begins to phase out at certain income thresholds. Single filers who make more than $75,000, heads of household who make more than $112,500, and joint filers who make more than $150,000 will see a gradual decrease in their credit amount for every $1,000 they make over that threshold. If the enhanced credit phases out completely, however, you can still qualify for the basic $2,000 child tax credit that was available in the past.

What about Children Born in 2021?

If you welcomed (or will be welcoming) a new little bundle of joy this year, you’ll be happy to know that your new child does qualify for the enhanced child tax credit. However, if you want to receive advance payments on the credit for that child, you will need to update your information with the IRS. You’ll be able to do this through a new portal on the IRS website; however, that portal isn’t completely built out yet.

If you don’t update your information, don’t worry; you can still get the credit you qualify for when you file your 2021 return next year.

What’s the Impact on My Tax Return?

The child tax credit itself will simply decrease the taxes you owe or increase your refund—so nothing but good news there. The one thing you should be aware of is how those advance payments impact your return. Because the amount you receive is calculated based on previous tax returns, it is possible that you’ll be overpaid in those advanced payments. (However, this is only likely to happen if your income has increased significantly, or if your children no longer live with you at least 6 months out of the year.)

If you are overpaid, you may have to pay back a portion or all of the overpaid amount. If you’re not overpaid, your credit will be reduced by whatever amount you did receive in advance payments. You’ll get a statement from the IRS early next year to help you reconcile your advance payments with your total child tax credit amount.

To get answers to additional questions on the increased child tax credit, contact Demian & Company, CPAs, today.