The American Rescue Plan Act (ARPA) of 2021 changed the Child Tax Credit for 2021. This will result in eligible taxpaying parents getting some extra cash in their pockets over the next 12 months. ARPA put this in effect for 2021 and the basis of the benefit is determined from 2020 tax returns. So if you think you are eligible for this credit and have not filed your 2020 taxes, the IRS would encourage you to do so!
Child Tax Credit Changes
MDS is here to help you navigate through this change, as it is not as cut and dry as it may seem. The key changes are as follows:
-Expanded Child Tax Credit for 2021 only
-Credit for qualified children is fully refundable
-The Child Tax Credit includes children turning 17 in 2021 calendar year
-If you qualify for the Child Tax Credit, this can be partially paid in 2021, in advance of filing your 2021 taxes
Who Qualifies for the Child Tax Credits
The Child Tax Credit have been around for a long time. The ARPA change is increasing the amount for those that qualify for Child Tax Credit. The qualifying details for Child Tax Credit remain the same as in 2020. All tax payers with eligible children qualify for the Child Tax Credit, however, it is phased out if you land in one of the following groups:
-Income over $150,000 for married filed jointly tax returns and qualifying widows and widowers
-Income over $112,500 for those filing as heads of household
-Income over $75,000 for all other tax payers
-Any taxpayer whose main home is not in the United States for half of the year will not qualify
Child Tax Credit Amounts in 2021
The Child Tax Credit was expanded for 2021 only. The expanded amounts are based on the child’s age at the end of 2021. As we mentioned prior, ARPA also expanded Child Tax Credit for children that will be turning age 17 in 2021. The rule prior to this change, allowed for the Child Tax Credit for children under the age of 17 at the end of the year.
THE ARPA change also provides a greater credit in 2021 for children under 6 years of age. This is a nod to the great cost of childcare and lack of a government sponsored paid parental leave plan, both of which we have discussed in prior posts on MDS. 2021 Child Tax Credit are set to the following levels through the ARPA change:
-Children under 6 years of age at the end of 2021 will garner a credit of $3,600 (per child) up from $2,000 in the prior rules.
-Children from 6 to 17 years of age at the end of 2021 will garner a credit of $3,000 (per child) in 2021 also up from $2,000 in prior years. This is also where the addition of the 17 year old will benefit families with kids finishing high school and possibly considering college.
Tax Planning for the Child Tax Credit Change
This is where things get tricky. People traditionally had the historic levels budgeted into their tax strategy. The $2,000 credit (if eligible) would be realized when completing taxes (traditionally in the spring) for the prior year. The change to this years plan allows for some of the tax credit to be paid to eligible families in the 2021 calendar year, based on 2020’s tax returns.
This change to how it is paid out, could create some tax complications for those who plan for this to be part of their return each year. The early payouts would minimize the amount of the credit that is left to apply when completing your 2021 returns. The ARPA allows for 50% of the Child Tax Credit to be paid to eligible families between July and December of 2021.
There are some options to consider if you are concerned how this will effect your 2021 tax planning. If an eligible taxpayer does not want to get the advanced payments in 2021 and hold the full amount for when they complete their return, the IRS has said that this will be accommodated. The IRS also stated that those that may earn out of the eligible category in 2021, can opt out of the tax credit as well. This is very important to consider, as you will not want to take 50% of the credits in 2021 if you know your earnings will put you above the max earnings allowed to take the credits.
What to do Next
In their May 14th, 2021 update the IRS provided the following statements on how they will further communicate next steps on these changes:
“Taxpayers will also have the opportunity to update information about changes in their income, filing status or the number of qualifying children. More details on how to take these steps will be announced soon.”
“Taxpayers will also have the opportunity to update information about changes in their income, filing status or the number of qualifying children. More details on how to take these steps will be announced soon.”
For eligible taxpayers that want to start receiving the credits in 2021, you do not need to take any actions except to ensure you filed your 2020 taxes. It is expected the Child Tax Credits will be paid out starting in July. These will be paid using the same path that you received or paid your 2020 taxes (direct deposit or paper check).
If you are eligible for this, it is very important to know what the plan change means for your family. If you do nothing and take the credits but are not going to be eligible in 2021, you will be in for an unhappy surprise when completing your 2021 taxes. At the same time, if you have Child Tax Credits as a strategic part of your tax strategy, be aware of what these changes will mean for you. For everybody else who is eligible and will continue to be in 2021, enjoy some new found dough!