Significant enhancements have been made to the Child Tax Credit under the American Rescue Plan Act of 2021.  One of the major changes requires that half of the total credit be paid in advance.  The second half of the credit will be distributed as a lump sum payment as part of your tax refund in 2022.

Starting July 15, 2021, eligible families with qualifying dependents will receive the first half of the credit spread out in six monthly payments, unless you choose to unenroll from the monthly payments.  Although, it is too late to opt out of the first monthly distribution, the deadline to opt out of the next payment is August 2nd.

The automatic payment amounts are based on your Adjusted Gross Income (AGI) as reported on your 2020 tax return (or your 2019 return if your 2020 return has not yet been filed).  The majority of these payments will be made via direct deposit, although paper checks or debit cards may be issued.

Importantly, the American Rescue Plan temporarily increased the tax break from $2,000 per child in 2020, to $3,000 ($3,600 per child under age 6) in 2021.  Households eligible for the $1,000 (or $1,600 increase) must have an AGI of $75,000 for single filers, $112,500 for head-of-household and $150,000 for married filing jointly.

To illustrate, a married couple with two children ages 5 and 12, having an AGI of $125,000 in 2020, will be eligible to receive a $6,600 child tax credit in 2021. The first half of the credit (or $3,300) will be paid out in six monthly payments of $550 from July to December 2021.  The second half of the credit (or $3,300) will be paid after they file their 2021 tax return in 2022.

Families with higher incomes will be subject to a phaseout of the increased portion of the credit.  A reduction of $50 for every $1,000 earned over the AGI thresholds will be applied to the $1,000 or $1,600 increase.

Other significant changes to the Child Tax Credit include:

• 17 year-olds qualify for the credit;
• 18 year-old dependents or 19-24 year-old, full-time college students may qualify for a one-time payment of $500 in 2022; and
• The credit is fully refundable so qualifying families will receive the payments even if they don’t owe income taxes.

Note: If you receive the advance payments in 2021 and it turns out that you don’t qualify because your 2021 AGI exceeds the threshold, you may have to repay the advance payments.

The IRS has established a CHILD TAX CREDIT UPDATE PORTAL to help families determine if they are enrolled to receive the tax credit, unenroll from getting advance payments, or provide/update account information for the August payment.

Questions?  Contact Debra O’Malley at domalley@ctm-cpa.com or (847) 405-0944.