American Rescue Plan: Enhanced Child Tax Credit

Yes, that’s right, the expanded, Advance Child Tax Credit is NOT stimulus money. The Child Tax Credit is an ADVANCE payment of next year’s Child Tax Credit. Taxpayers with qualifying children are entitled to claim qualifying children for an income tax credit.

With that said, there are two types of credit: refundable credit and nonrefundable credit. Although both kinds of credit can reduce your tax liability, only a refundable credit can give you a tax refund even when you do not owe taxes.

The expanded, Advance Child Tax Credit is a refundable credit for the 2021 income tax year. This refundable tax credit is being given in ADVANCE to taxpayers with qualifying children. The amount of the expanded, Advance Child Tax Credit payments that you receive during 2021 is based on the IRS’s estimate of the Child Tax Credit amount that you appropriately would be allowed for the 2021 tax year. The law requires this estimate to be based on two primary sources of information:

  1. Your 2020 tax year return or, if that return is not available, your 2019 tax year return
  2. Any updated information you provide to the IRS in 2021, including information provided through the Child Tax Credit Update Portal (CTC UP), which will allow you to update with the IRS your Child Tax Credit information throughout 2021, including any changes in the number of your qualifying children, changes in your income, and changes in your filing status.

In fact, the IRS began paying the Advance Child Tax Credit on July 15, 2021. The Internal Revenue Service will issue half the total credit amount, in advance, the middle of every month, from July 15 to December 15, 2021. You will claim the other half when you file your 2021 income tax return in 2022. As of now, these tax law changes apply to tax year 2021 only.

The maximum credit is available to taxpayers with a modified adjusted gross income of:

  • $75,000 or less for single filers and married persons filing separate returns
  • $112,500 or less for heads of household
  • $150,000 or less for married couples filing a joint return and qualifying widows and widowers.

For tax year 2021, qualifying families claiming the Child Tax Credit will receive:

  • Up to $3,000 per qualifying child between the ages of 6 and 17 at the end of 2021
  • Up to $3,600 per qualifying child under age 6 at the end of 2021

The Child Tax Credit begins to be reduced to $2,000 per child if your modified AGI in 2021 exceeds the amounts listed above:

  • Phase One: Reduces the Child Tax Credit by $50 for each $1,000 (or fraction thereof) by which your modified AGI exceeds the income threshold described above that is applicable to you.
  • Phase Two: The Child Tax Credit will not begin to be reduced below $2,000 per child until your modified AGI in 2021 exceeds:
    • $400,000 if married and filing a joint return OR
    • $200,000 for all other filing statuses

The second phase reduces the Child Tax Credit by $50 for each $1,000 (or fraction thereof) by which your modified AGI exceeds the income threshold described above that is applicable to you.

The IRS has an eligibility assistance site to help you check if you might be eligible for advance payments of the Advanced Child Tax Credit

For the 2021 income tax filing season, a qualifying child is under age 18 at the end of 2021. This differs from the 2020 income tax filing season as a qualifying child was under age 17 at the end of 2020.  Other general rules from income tax year 2020 in regards to the Child Tax Credit do not apply in 2021.

American Rescue Plan: Enhanced Child Tax Credit – While millions of American families view the expanded, Advance Child Tax Credit (money) as a lifeline needed to pay basic expenses, others view it as a windfall. Do you need to take the Advance Child Tax Credit?  That is entirely up to you. However, it is important to think ahead. Do you have a plan for spending or not spending the money?  (You have an opportunity every month through December to unenroll before the next payment lands. The deadline is three days before the first Thursday of every month)

If you feel certain you will not owe money come income tax time AND spend the Advanced Child Tax Credit (money) responsibly … why not? The premise of the expanded, Advance Child Tax Credit, as part of the American Rescue Plan Act of 2021, is to help families and to help stimulate the economy. But that does not mean the advanced credit (money) should be spent thoughtlessly.  Being sensible and responsible can help set you up for future success for years to come.

Financial literacy is an understanding of the skills and knowledge that allows an individual to make informed and effective decisions with all their financial resources, including taxes! Make time to learn about the expanded, Advanced Child Tax Credit. Strong financial knowledge and decision-making skills help people weigh their options and make informed choices for their financial situations, such as deciding how and when to save and spend, comparing costs before a big purchase, and planning for retirement or other long-term savings. Be prepared, research your options, and have a plan. You will be glad you did!

The IRS doesn’t initiate contact with people by email, text messages or social media channels to request personal or financial information. People should watch out for websites and social media attempts that request money or personal information and for schemes tied to Advance Child Tax Credit payments, Economic Impact Payments, or other tax topics. Be careful of SCAMS.  Report these scams to the IRS.

Heidi Copeland
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