As we all get accustomed to the new delivery method and the expansion of the Child Tax Credit due to the American Rescue Plan Act of 2021, we’re hearing many questions about how this new tax credit works and how it differs from previous years. We discussed the tax credit in detail with specific examples here, and today, we’re answering a few of the most frequently asked questions regarding the new Child Tax Credit.
Give me a general overview of the changes.
The normal Child Tax Credit (before 2021) is $2,000. This credit is available to taxpayers with income below $200,000 (or $400,000 for Married Filing Jointly).
This year only, there is an additional $1,000 credit for children from ages 6 to 17 (making it $3,000 per child), and an additional $1,600 for children under age 6 (making it $3,600 per child).
You will receive half of that total through the months of July through December 2021, and then you will receive the rest of that in the form of a tax credit next spring.
The additional credit is available to taxpayers making under $75,000 (or $150,000 for Married Filing Jointly).
Am I eligible for the Child Tax Credit?
There are essentially three qualifications for receiving the Child Tax Credit. These are:
- You must have a qualifying child
- You must live in the United States for over half of the year
- You must meet the specific income thresholds
If you are unsure about whether or not you have a qualifying child, here are the stipulations, according to the IRS website:
- The child must be 17 years old or younger
- The child must be a son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, or half-sister (or descendent of one of these)
- The child must be dependent on the taxpayer during 2021
- The child must live with the taxpayer for at least half of the year
- The child must be “properly claimed” as the taxpayer’s dependent
- The child must be a citizen of the United States
If you make over a certain amount, you will not be eligible to receive the additional Child Tax Credit.
All of that to say, if you have a dependent who is younger than 17, you live in the United States, and you meet the income threshold, you should be receiving an automatic payment for the Child Tax Credit, beginning this month.
Should I opt out of the Child Tax Credit? And, if so, how do I do that?
Maybe — but it depends on your own specific situation and your preferences. If you think you will owe more taxes than the entire amount of the Child Tax Credit, you may wish to opt out. You may also choose to opt out if you prefer to receive the Child Tax Credit as more of a lump sum payment than monthly payments. Essentially, the payments are being provided to you in advance of your normal tax credit, so keep that in mind when deciding.
If you choose to unenroll, you can do this at any time, and you only have to do it once. Note that if you usually file your taxes as Married Filing Jointly, you’ll both need to unenroll. To unenroll, follow the instructions provided here.
Will this affect the Child Tax Credit that I normally see as a tax refund?
Yes. The Advance Child Tax Credit that you’ll see starting in July as a monthly payment ties directly to the amount of refund or taxes owed you’d normally see when filing your taxes. That means you should plan to see a smaller Child Tax Credit in the spring of 2022. Essentially, the government is spreading out the Credit and paying it this year, since it has been a difficult year for many due to the pandemic.
Are Child Tax Credits taxable?
No, these payments are not taxable since they’re not technically “income” that you’ll need to report on your 2021 tax return.
As always, if you have further questions or need guidance on whether to unenroll or receive the Advance Child Tax Credit, we’re happy to discuss your unique situation with you.