The American Rescue Plan Act (ARPA) of 2021 expanded the Child Tax Credit and introduced some unique changes. You likely have heard about this lately in the news or from your accountant. This outline provides direct links to IRS information, a breakdown of and how it may affect you.
Does the Child Tax Credit change give me more money?
One key feature of the ARPA is the credit amounts have increased for the 2021 tax year: $3,600 for children aged 5 and under and $3,000 for children ages 6-17 (based on a child’s age at the end of 2021).
How has the Child Tax Credit changed?
Before 2021, the child tax credit was $2,000 for children under the age of 17. This substantial increase was welcomed news for millions of U.S. households.
Also note that the entire credit is fully refundable for 2021. This means that eligible families can still get the credit even if they owe no federal income tax. Prior to this year, the refundable portion was limited to $1,400 per child.
How does receiving advanced payments work? When will the money come?
Another feature of the ARPA is that parents can receive advance payments of the credit over the course of the next six months. The advance payments are meant to provide families with earlier and ongoing financial resources in order to help pay for household expenses.
Starting July 15, many American families will begin receiving the advance monthly payments of $300 per child under age 6 and $250 per child ages 6-17. The remaining portion of the credit [$1,800 or $1,500] will be claimed later when the 2021 tax return is filed.
For example, a family with a three-year-old child would receive $300/month between July and December for a total of $1,800. The remaining $1,800 Child Tax Credit will be claimed in 2022 when the 2021 tax return is filed.
Do I qualify for the new credit?
The new maximum credit is available to taxpayers with a modified adjusted gross income (AGI) of:
- $75,000 or less for singles,
- $112,500 or less for heads of household, and
- $150,000 or less for married couples filing a joint return and qualified widows and widowers.
What if I fall outside of these thresholds?
Above these income thresholds, the extra amount above the original $2,000 credit – either $1,000 or $1,600 per child – is reduced by $50 for every extra $1,000 in modified AGI. While the enhanced credits are phased out relatively quickly, many families will still qualify for the original $2,000 child tax credit. The original credit is phased out at higher incomes levels, making it more accessible to families with higher incomes. This IRS informational link provides detailed information about the phaseout ranges for both portions of the credit.
Can I opt out?
The advance payments were meant to provide families with earlier and ongoing financial resources in order to help pay for household expenses. However, you still have options on how you receive it.
Last month the IRS began sending letters to more than 36 million American families who may be eligible to receive the advance payments. The letters contained information about the ability to opt out of the advance payments. Those who opted out of the advance payments will instead receive the full child tax credit amount when they file their 2021 tax returns next year.
Visit the IRS Child Tax Credit Portal to find out if you’re enrolled to receive advance payments, unenroll to stop getting advance payments, or to provide updated bank account information for the monthly payments.
If you have any questions about this topic, we encourage you to speak with your tax preparer and with your SYM Financial Advisors team.