The New Child Tax Credit FAQ

The New Child Tax Credit FAQ

This week’s reader question is about the child tax credit for 2021:

What should I know about eligibility and financial planning implications for the new child tax credit?

The American Rescue Plan made significant updates to the child tax credit for 2021 that could dramatically lower the tax bills of families with young kids. Broadly, these changes include increases to the total credits (i.e., tax savings or refunds), adjustments to the maximum age of a qualifying child, modifications to refundability conditions and a new provision for advance payment of the credit during 2021.

Under prior law, the credit was $2,000 per qualifying child. Of that amount, $1,400 was refundable. Refundable credits are valuable because they allow for the possibility of receiving cash payments if the credit puts your tax liability below zero. Effective in 2021 (this year only), the child tax credit has been increased to $3,000 per qualifying child (up to $3,600 if your child is under the age of 6), and the entire amount is refundable.

Not only is the credit higher this year, but for the first time, families are receiving half of that total credit on a monthly basis from July through December. The remaining half will be “trued up” when they file taxes next year. For example, if you have two children, ages 8 and 10, you are eligible to receive $3,000 per child, or $6,000 total. Fifty percent of this will be paid out each month by check or direct deposit—depending on the information the IRS has on file for you. So in this case, you would receive $3,000 from July through December ($500 per month) and the remaining $3,000 in 2022 after you file your 2021 taxes.

What if you don’t want to receive prorated payments throughout the year? You can opt out by using the IRS Child Tax Credit Update Portal. We also recommend visiting this website to verify your eligibility for the credit and to select your preferred payment option. Please note that if your tax status is “married filing jointly,” both parents need to opt out separately.

The deadline to opt out for September is August 30. Once you have opted out, you cannot reenroll at this time.

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Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only and was obtained from what we believe to bs reliable sources. However, accuracy, completeness or reliability cannot be guaranteed and should not be construed as legal or tax advice or advice to purchase or surrender insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.