DISCLAIMER. The information provided in this article does not, and is not intended to be, legal, financial or credit advice; instead, it is for general informational purposes only.
In a Nutshell
People with qualifying children can claim the child tax credit on their federal tax returns to help reduce their tax burden. The child tax credit is going up in 2021, and many families will qualify for advance payment, which begins July 2021.
What Is the Child Tax Credit?
The child tax credit is a partially refundable tax credit for parents of qualifying children. This is different from a deduction or a nonrefundable tax credit.
A deduction reduces your taxable income. A credit reduces how much tax you owe. A refundable credit reduces how much tax you owe and could increase your refund. For example, if you are getting a refund of $100 and you have a refundable credit of $400, that brings your total refund to $500.
How Much Is the Child Tax Credit?
Prior to 2021, the credit was $2,000 for every eligible child under the age of 17. You could receive up to $1,400 of that credit back as a refund. The IRS also offered a $500 credit for dependents who didn’t qualify for the child tax credit, such as dependent children age 17 to 24.
The child tax credit started phasing out for individuals who made $200,000 and married joint filers that made more than $400,000.
The Child Tax Credit for 2021
The American Rescue Plan Act of 2021, or ARPA—one of the stimulus plans in response to COVID-19—provided a temporary expansion of the child tax credit. That expansion includes covering more children, increasing the credit amount, and providing for an optional advance partial payment of the credit. Here are some of the changes ARPA made for 2021:
- Older children are covered. Dependent children up to age 17 are covered by the child tax credit in 2021.
- The credit is fully refundable. The 2021 credit is fully refundable, which means if you have no earned income or don’t owe any taxes at all, you could get the entire credit as a refund.
- Increases the credit amount for some families. Low- and moderate-income earners will see a larger child tax credit in 2021. Children age 0 to 5 qualify for a credit of $3,600. Children age 6 to 17 qualify for a credit of $3,000.
The credit is cumulative, which means it adds up for multiple children. For example, a family with three children age 3, 6 and 10 would receive credits as follows:
- 3-year-old: $3,600
- 6-year-old: $3,000
- 10-year-old: $3000
- Total credit: $9,600
The 2021 child tax credits begin to be phased out for individuals making $75,000 or more and for married joint filers making $150,000 or more. This means if you make that much or more, you receive a reduced child tax credit or no credit at all.
2021 Advance Payments for the Child Tax Credit
To increase the stimulus impact of the enhanced child tax credit, ARPA lawmakers decided that families should receive part of the tax credit as an advance payment. According to the IRS, around 88% of families with children will qualify for these advance payments. Here’s how they’ll work:
- The payments will begin arriving in July 2021. They will then arrive on or around the 15th of every month through December 2021.
- Families will receive $300 per month for children under 6 and $250 per month for children age 6 to 17.
- Payments will arrive the same way stimulus funds previously arrived, either by check or direct deposit into a bank account.
- Eligible taxpayers must have a main home in the United States at least half the year and have qualifying dependents of the appropriate age on their 2019 or 2020 tax return.
Individuals will have the option to decline the advance payment. Families that accept the advance payment won’t get that amount of tax credit on their 2021 returns in 2022.
For example, if you have one child who is 7 years old, you would qualify for a $3,000 tax credit for 2021. If you accept the 6 months of advance payments of $250 each, that’s $1,500. When you file taxes, you would only get an additional credit of $1,500 and could not get a refund for the total $3,000 as you already received half of it as advance payments.
Dependent children age 18 to 24 are still eligible for the nonrefundable $500 tax credit in 2021.
What Happens to the Child Tax Credit After 2021?
For 2022 and future years, the child tax credit returns to previous levels. ARPA only made changes to the child tax credit for the tax year 2021.
What Do You Need to Do to Get the Child Tax Credit?
If you have qualifying children, you only need to include them appropriately as dependents on your tax return. If you haven’t filed your 2019 or 2020 taxes, do so as soon as possible to ensure you qualify for the tax credit and advance payments.
This article originally appeared on Credit.com.