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How Will the New, Improved Child Tax Credit Work?

By Charlene Rhinehart, CPA - Mar 15, 2021 at 6:31AM

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Extra money may be coming your way soon, but not everyone will qualify and payment will be a bit different.

The child tax credit (CTC) has always been one of the most popular tax credits around, but President Biden's $1.9 trillion American Rescue Plan just made the benefits even sweeter. It includes new provisions for the 2021 CTC, which allows families to receive $3,000 per qualifying child ages 6 to 17, and $3,600 per child under six.

Unlike the historic CTC, this credit will also be fully refundable. That means you can enjoy the benefits of the credit even if you don't owe any income taxes. You'll get a cash refund for the amount in which your total tax credits exceed the amount of taxes owed.

If you have kids, you're probably trying to wrap your head around all of this and determine if you're eligible for the extra money. Here's some good information to keep in mind as you manage your financial plan for the year. 

Family with two children Meeting With Senior Financial Advisor.

Image source: Getty Images.

Filing your 2020 tax return 

Many people submitted tax returns in February as the 2021 filing season opened. If you were an early bird, you are probably wondering how the changes to the child tax credit impact your tax return.

In short, it will not impact your 2020 tax return. You won't have to make any amendments to your return because eligibility is based on your 2019 or 2020 return, depending on when you filed. Some other tax provisions unrelated to the child tax credit did affect 2020 returns, however. Nonetheless, the IRS is urging taxpayers to avoid taking unnecessary steps and amendments at this time, and wait until further guidance is provided. 

The CTC provision is for 2021 but you may not have to wait until you file taxes next year to receive benefits. The IRS could start distributing CTC payments as early as this summer, allowing individuals to receive an advance tax credit to cover their expenses now. We'll go into more details later. 

Child tax credit eligibility

Historically, the CTC provides individuals with adjusted gross incomes up to $200,000 (and married couples filing jointly with AGI up to $400,000) a chance to claim up to $2,000 child tax credit per child. That's still the case for the first $2,000 of the enhanced credit.

For 2021, only individuals who have an adjusted gross income (AGI) up to $75,000 will qualify for the full $3,000 or $3,600 tax credit per child. If you're filing jointly as a married couple, your AGI could be up to $150,000 to qualify. If you exceed these thresholds, the credit will be reduced by $50 for every additional $1,000 of adjusted gross income earned. Simply put, once an individual with children aged 6 to 17 exceeds an adjusted gross income of $95,000, they will no longer be eligible to receive the enhanced credit under the new provision.

Also, there is no earned income requirement to receive this credit in 2021. Previously, you could not qualify for the credit if you did not earn at least $2,500 per year. 

How payments will work

As stated earlier, you won't have to amend your 2020 tax return to cash in on this benefit. Your eligibility will be determined based on the most recent return on file -- 2019 or 2020. Then, you'll qualify to receive an advance child tax credit as early as 2021.

Essentially, you won't have to wait until 2022 to start receiving cash for your 2021 tax credit. Payments could start as early as July, possibly providing half of the advanced tax credit in six-month installments until December, and leaving the remaining amount to be given in 2022 when the taxes are filed next year.

If you have children aged 6 to 17, you can expect an extra $250 per child. In total, you'll receive $1,500 per child during a six-month period and you'll get the other $1,500 as a tax credit when taxes are filed. 

Next steps 

While the CTC boost from $2,000 to $3,000 is only a temporary increase for the 2021 tax year, there are policymakers who want to make the monthly checks to parents permanent. 

As new information unfolds, it's important to work with your tax professional or CPA to ensure you can claim the benefits you are eligible for. For many families, this boost can be a lifeline against poverty. Studies have shown that the poverty rate has increased since the pandemic started. 

Although the CTC benefits won't kick in immediately, many Americans will have access to a $1,400 stimulus check that can add a bit of financial cushion until more information becomes available about the CTC. Make sure your direct deposit or bank account information is up to date to receive timely delivery. 

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