2021 Changes to the Child Tax Credit in Response to COVID-19

By Brittany Raecke, Tax Senior Associate | Family, Executive & Entrepreneur Advisory Services Team

What You Need to Know About Changes to the Child Tax Credit

With the passing of The American Rescue Plan Act of 2021 several changes were made to the child tax credit. These changes however, are only applicable to tax year 2021, as they were designed to help families facing financial hardships due to the COVID-19 pandemic. These temporary changes included the following:

• Raised the age of qualifying children from 16 to 17
• Made the credit fully refundable (meaning you can receive the credit even if you have no tax liability)
• Created an expanded credit ($1,000 for children ages 6-17/$1,600 if child is under 6 as of December 31, 2021, for those taxpayers whose income (specifically, modified adjusted gross income) is less than $75,000 for single filers, $150,000 for married filing jointly filers and $112,500 for head of household filers. Credit phases out for households with income above these thresholds.
• One half of the expanded credit to be paid in advance of filing 2021 tax returns. Payments start July 15, 2021, and continue monthly through December 15, 2021. The other half to be claimed on the taxpayer’s 2021 income tax return. Taxpayers generally won’t need to do anything to receive any advance payments as the IRS will use the information it has on file to start issuing the payments (via direct deposit if on file, otherwise checks or debit card to be issued).

How do families qualify for the advanced credits?

• Filed a 2019 or 2020 tax return and claimed the child tax credit or given the IRS your information using the non-filer tool on the irs.gov website
• A main home in the U.S. for more than half the year or file a joint return with a spouse who has a main home in the U.S. for more than half the year
• A qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number
• Income less than certain limits (listed above)

IRS Childcare Tax Credit Opt-Out Portal

While the expanded child tax credit and advance payments will be welcome relief for some families, it will could leave some families with a surprise tax bill next April. The IRS is calculating the credits based on taxpayers’ 2020 (2019 if no 2020 return on file) reported income and assumes dependents claimed on those returns will be the same in 2021. So, if you expect your income in 2021 will be too high to qualify for the additional credit, or you are a divorced parent who was eligible for the child credit in 2020, but not 2021, you could be getting advance payments of credits that you will have to pay back when you file your 2021 tax returns next April.

To prevent some taxpayers from having to repay the credit later, the IRS has created a portal where taxpayers can opt out of the advance tax payments. This process has proved cumbersome and time consuming for many taxpayers as many steps must be taken to verify a taxpayer’s identity before being able to un-enroll. For those who have trouble using the portal, we recommend just holding on to the advance payments so you are prepared to pay that money back next April.

If you do not receive the advance credits because your most recent filed tax return reports income that is too high, but you expect your 2021 income to be below the thresholds for claiming the advance credit, you will not miss out on the additional benefit. You will be able to claim 100% of the available expanded credit on your 2021 tax return.

These changes to the child tax credit are for in effect for 2021 only. However, many democrats would like to see these additional benefits made permanent. President Biden’s proposed American Families Plan would extend the expanded credits through 2025.

Questions on this or other family tax planning matters? Contact your Keiter Opportunity Advisor or Email | Call: 804.747.0000