New Guidelines For Child Tax Credits You Should Know

Two of the functions of the IRS and our tax system is to cover the cost for our federal and state governments to help regulate and facilitate an open economy while also helping families participate in the economy, creating a symbiotic relationship that moves support back and forth.

This system helps families with the child tax credits that began with the Taxpayer Relief Act of 1997. Being fully implemented in 1998, the child tax credit has undergone many changes over the years including changes in the amount families are eligible for as well as the requirements surrounding who qualifies.

Why You Need to Know When Changes Occur

Continually updating the parameters surrounding child tax credits is how the government can try to adapt to the current needs of the people. Many families rely on these tax credits to help cover expenses that children incur over the years, everything from the daily cost burdens of nutrition and housing to less frequent but still recurring costs such as healthcare visits and clothes to accommodate growth.

The tax credit began as $400 maximum per child, quickly increasing by hundreds of, sometimes thousands, dollars each time an amendment was made to the provision. The Tax Cuts and Jobs Act of 2017 saw one of the largest increases in recent history, taking the previous $1,000 cap and increasing the amount to $2,000 with up to $1,400 being refundable.

What the Newest Legislation Means

Not only increasing the amount each eligible child can be claimed for, the American Rescue Plan Act of 2021 has made adjustments to which households are eligible and the ability to have the credit refunded.

The 2021 tax year sees family able to claim up to $3,600 for each child under the age of 6 and up to $3,000 per remaining eligible dependent up to 17 years old, up from the previous age limit of 16. Why the disparity between the age groups? This is to accommodate the higher costs associated with more frequent doctor visits and the replacement of clothes, beds and other furnishings that children physically outgrow at a rapid pace during their early years.

Eligibility Changes On Household Income

Two-parent households will be able to claim the full amount if they make less than $150,000 annually with the credit dropping to a minimum $2,000 once income surpasses that threshold. Single filers have annual income capped at $75,000 in order to still receive the full amount per child, falling to the same $2,000 once income goes above and beyond the limit.

To find out how much your credit will be if you fall in the area of income that sees the amount phasing out, it’s simply reduced by $50 for every $1,000 in adjusted gross income over the $150,000/$75,000 limit for family and single filers respectively before stopping at the $2,000 floor. In the case of multi-parent homes where one parent files as head of household, the income cap is split down the middle at $112,500.

The credit will completely phase out for single filers earning $200,000 or more and families earning $400,000 or more.

When To Expect 2021 Payments

The American Rescue Plan Act of 2021 will begin payments on July 15th, providing households with monthly payments totaling half of the annual eligible amount to be disbursed through December. Families that have kept their tax filing current won’t have any extra steps to complete, the funds will simply be deposited to the same bank account used for previous tax returns and stimulus payments.

If no taxes were filed in your household last year then you’ll still be eligible for the credit as the new act breaks ground by providing child tax credits to households with no earned income. It’s important to note that while there are groups pushing to make these changes permanent, they are only expanded for the next year. Something to bear in mind when budgeting or planning out future purchases for your children.

What Changes in Refundable Amount Means

One of the biggest changes that not many tax payers even know needed addressed was the fact that those that receive a child tax credit for 2021 will be able to have the amount fully refunded, meaning none of it will need to be paid back with the following year’s taxes.

While this will keep the tax credit fully in the pocket of most families, there are situations in which you could be paid more than you’re eligible for and be required to pay it back with your refund or tax payment come next April. The most common situations this happens in would be change in income, filing status or their children are no longer able to be claimed as dependents.

At the end of the day, these expanded resource given to parents can help offset impacts from the pandemic and changes to technology requirements to accommodate school from home. Be sure to stay informed as we update you with the latest changes impacting your family’s financial resources.

Opt-out Options

June 28^th, 2021 was the last day to opt-out of receiving the first round of the child tax credits. However, don’t fret. There are still options to opt back in or opt out of future payments if you missed the deadline.

If you would like not to receive the child tax credits, you can find  the opt-out schedule in the table below.

(chart courtesy of Today is the Last Day to Opt-Out of First Child Tax Credit Payments | Kiplinger)

Keep in mind, if you choose to unenroll and choose to opt back in, you are likely going to miss some payments. For example, if you opt-out of the first payment you cannot opt back in until late September. So, you will be missing the August and September payments. If you would like to opt-out, you can do so at the IRS Child Tax Credit Update Portal.