President Biden’s American Rescue Plan included a significant change to the Child Tax Credit for 2021.  This change will impact both the timing of when you receive your 2021 child tax credits and the amount of these credits.

First, the credit will be raised from $2,000 to $3,000 for children between the ages of 6 and 17 and to $3,600 for children under 6 for the 2021 tax year.

The credit is available to taxpayers with 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.

For modified adjusted gross income above these amounts, the Enhanced Child Tax Credit will be reduced (phased out) by $50 for every extra $1,000 in additional modified AGI.

Second, the Enhanced Child Tax Credit will be paid out monthly beginning on July 15, 2021. The payments will be direct deposited or sent via a paper check from the IRS on the following dates: July 15, August 13, September 15, October 15, November 15 & December 15. For children 5 and under a monthly payment of up to $300 per child will be made and for children between the ages of 6 and 17 a monthly payment of up to $250 per child will be made.

A qualified taxpayer will end up receiving half of the credit in 2021 and the remainder when they file their 2021 tax return in 2022. Unlike prior years, the credit is fully refundable in 2021—even if you pay no other tax. The advance payments of the 2021 Child Tax Credit will be based off your 2020 tax return. If the 2020 tax return has not been filed yet, the IRS will use the 2019 tax return.

If you have a new child in 2021, the IRS will be creating an online portal where you can update the IRS with the information needed—including a social security number.

You will also be able to update your income, filing status, and direct deposit information via an online portal through the IRS website. By updating this information, you will ensure that you receive the correct amount of the credit. More details on the online Child Tax Credit Update Portal will be available soon. Please continue to check the IRS.gov website.

What if you do not want to receive the advance payments? The IRS online portal will allow you to opt out of these advance Child Tax Credit payments. You can then take the full Child Tax Credit on your 2021 Tax Return when you file it in 2022.

The one thing to keep in mind, this is an advance payment of the Child Tax Credit. By receiving the payments in July through December of 2021 you will reduce the amount of the Child Tax Credit on your tax return in 2021.  This could create a situation where you might owe tax when you file your return. 

Please feel free to reach out to your Ketel Thorstenson, LLP advisor with any questions or concerns.