The IRS announced this week that it has started sending letters to more than 36 million American families who may be eligible for the enhanced child tax credit with monthly payments set to begin in July.
So, what is the enhanced tax credit and why should you care? First, if you have qualifying children under the age of 18, you may be able to claim a child tax credit. (You may also be able to claim a partial credit for certain other dependents who are not qualifying children.) Next, what you may not have known is recent legislation (The American Rescue Plan Act of 2021) makes substantial, temporary improvements to the child tax credit for 2021. These changes may increase the amount you might receive. Here is a quick summary of the changes.
The legislation makes 17-year-olds eligible as qualifying children in 2021. Thus, children age 17 and younger are eligible as qualifying children in 2021.
For 2021, the child tax credit amount increases from $2,000 to $3,000 per qualifying child ($3,600 per qualifying child under age 6). The partial credit for other dependents who are not qualifying children remains at $500 per dependent.
New for 2021, eligible taxpayers may receive periodic advance payments for up to half of the refundable child tax credit during 2021, generally based on 2020 tax returns. Yes, you got that right, the government might actually be sending you money, instead of the other way around. The U.S. Treasury will make the payments between July and December 2021. For example, monthly payments could be up to $250 per qualifying child ($300 per qualifying child under age 6).
Eligible taxpayers will be automatically opted into monthly advance payments for the child tax credit based on their 2020 tax filing. Starting July 1st, taxpayers will have access to two portals created by the IRS to allow them to either: (1) update family details and (2) opt out of the monthly advance payments and instead show the child tax credit on their 2021 tax return, similar to years past.
The combined child tax credit (the sum of your child tax credits and credits for other dependents) is subject to phaseout based on modified adjusted gross income (MAGI). Special rules start phasing out the enhanced portion of the child tax credit in 2021 at much lower thresholds than under pre-existing rules. The credit, as reduced under the special rules for 2021, is then subject to phaseout under the pre-existing phaseout rules.
The following table summarizes the effect of the phaseouts on the child tax credit in 2021, based on modified adjusted gross income.
Single/Married filing separately
Married filing jointly
Head of household
Up to $75,000
Up to $150,000
Up to $112,500
No reduction in credit
$75,001 to $200,000
$150,001 to $400,000
$112,501 to $200,000
Credit can be reduced to $2,000 per qualifying child, $500 per other dependent
More than $200,000
More than $400,000
More than $200,000
Credit can be reduced to $0
To summarize, as you see, whether or not you will qualify for the enhanced child tax credit payments will depend on your filing status, income and other factors. However, what I can say is it seems the child tax credit in general and the tax reporting around it just got a lot more complicated for some folks. Be on the lookout for payments in July if you qualify. If you do not qualify but know someone who might, feel free to forward this along.
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