I don’t normally write about taxes much this time of year, but one of the tax changes from The American Rescue Plan Act (ARPA) of 2021 may require taxpayers with children to put some extra thought into their tax planning and their budgeting. So, I plan to talk about it frequently.
The Child Tax Credit was expanded for those who are eligible to receive the credit. Many families and many taxpayers will find it helpful. But some should do a bit of analysis to avoid any unpleasantness when filing their 2021 tax return.
Currently, this change only applies to 2021 and NOT any following years.
- Age of Children Who Qualify ~ First, there is one change regarding who is a qualifying child for the credit. The credit will include children who turn 17 in 2021. In previous years, children who turned 17 during the tax year did NOT qualify the taxpayer for the child tax credit.
- Credit amount will increase for many taxpayers. Previously, it was $2000 for each qualifying child. Now, the child tax credit is:
- $3000 for ages 6 to 17
- $3600 for under 6
- Note: The increased amount starts to phase out (be reduced) for incomes over $150,000 for married taxpayers filing a joint return and qualifying widows or widowers, $112,500 for heads of household, and $75,000 for all other taxpayers.
- The credit is fully refundable. This means that taxpayers who didn’t receive the full child tax credit in previous years due to their low or no tax liability may receive the full tax credit and bigger tax refunds.
- An Advance on the Child Tax Credits in the law means that Taxpayers may receive part of child tax credit in 2021 before filing their 2021 tax return. The total advance payments may be up to 50% of the child tax credit. Payments will start in July and go through December and will be based on the 2020 tax return filing (or 2019 if you haven’t filed the 2020 return in time). Advance Child Tax Credit Payments in 2021 | Internal Revenue Service (irs.gov)
Unfortunately the advance child tax credits – these monthly payments – can be a problem for some taxpayers. For most it will be beneficial and helpful, but for others, some thought and planning will need to be done.
Taxpayers will be able to (Once the IRS sets up the methods to do those things–They haven’t yet.):
- Opt-Out of the advance payments
- Adjust the factors that go into the calculation (such as filing status, number of qualifying children, income) for the advance payments
Who might want to opt-out or make an adjustment to withholdings to compensate? I’ll cover that in the next Blog Post. Should you Opt-Out of the coming Advance Child Tax Credit Payments? – Better Financial Counseling Network
——-
Better’s Accredited Financial Counselor’s Meet Us are fee-only and are experts in helping families build financial stability, security and wealth. To schedule a free consultation, Contact us today.
___________
Coming Soon: How to opt-out of IRS Advance Payments of Child Tax Credit?
___________
Photo by Paige Cody on Unsplash