April 27, 2021 badgercpadev

The Revised Child Tax Credit

President Biden signed the American Rescue Plan into law on March 11, 2021.  The plan creates provisions designed to aid the country after COVID-19 shut downs devastated the economy and took a massive toll on many Americans’ jobs. In an effort to reach as many affected Americans as possible, the Child Tax Credit was revised for tax year 2021.  Read on for more details on how this affects your 2021 tax return.

 

What is the Child Tax Credit?

Currently, taxpayers with qualifying dependent children benefit from a per child credit on annual tax due.  A credit is more beneficial to taxpayers than a tax deduction.  It is a dollar for dollar decrease in actual tax due, whereas a deduction only reduces taxable income.

 

What changes were made for tax year 2021?

Several changes were made to the credit, but perhaps the most relevant is the credit increase from $2,000 to $3,000 for qualifying children six years old to seventeen years old, as of the close of the year.  Taxpayers with children under age six will receive a $3,600 credit.  Prior to tax year 2021, the credit is only partially refundable.  This means that even if a person has no tax due, the taxpayer will receive a $1,400 refund rather than the full $2,000.  The new plan makes the credit fully refundable.

 

Is everyone with qualifying children eligible for the credit?

As in previous years, the credit is still subject to a phaseout based on the taxpayer’s adjusted gross income (AGI).  For joint filers, the phaseout begins at $150,000 AGI, and for single filers, it begins at $75,000 AGI.

 

Do I have to wait until my return is filed in 2022 to get my credit?

Under the new “advancement of credit” provision, if certain criteria are met, taxpayers will be eligible to receive fifty percent of the credit before they file their return.  The remaining half will be available to offset tax due or as a refund when the tax return is filed. If EFT information is currently on file with the IRS, any credit advancement payments will be sent to taxpayers’ accounts.

 

Is there anything I can do now to help me get my credit?

In the coming months, the IRS is expected to create a portal for taxpayers to use if they need to update EFT information or the number of qualifying children on their return. You will also be able to opt out of the advance payments if you prefer.  It’s important to note the IRS will use the information provided on the most recently filed tax return to determine phaseout eligibility for the credit.  If a taxpayer’s AGI has decreased significantly between tax year 2019 and 2020, it’s critical to file the 2020 return as soon as possible to receive the periodic advance payments when they begin this July.  Otherwise, you will have to wait until the 2021 return is filed to claim the credit.

 

If you’d like more information on the Child Tax Credit or have any other tax questions, give us a call or set up a FREE virtual consultation!