Updated: Oct 1
If you are a parent with children under age 17, this news is for you.
By now you may have heard that you will be receiving an advance on the child tax credit for the 2021 tax year. It will come in the form of monthly payments from the IRS. While many of us are excited about this additional income, there are some details to be aware of. Let’s dive in!
First, let’s review the basics of the child tax credit.
The original credit was introduced as part of the Taxpayer Relief Act of 1997 to help ease the additional expense families with children face. At first, it was a non-refundable tax credit of $400 per child under age 17. In 1998, the credit was increased to $500, and it became a refundable tax credit in 2001. In 2020, the child tax credit was worth $2000 per child under age 17. Today, with the implementation of the American Rescue Act of 2021, the application of the child tax credit has become more complicated.
In previous years, this credit was claimed when you filed your income taxes. In 2020, if you had two dependent children under age 17, you were allowed to take a credit of $4000. Now in 2021, there are two main differences. First, the credit was increased to $3600 per child under age 6 and $3000 per child from ages 6 to 17. Using our earlier example, two dependent children that afforded you a $4000 credit in 2020 are now worth a $6000 credit in 2021 (assuming they are between ages 6 and 17). This leads us to the second difference.
Beginning this month, the IRS will automatically send you an advance of the 2021 child tax credit.
You can expect to collect half the credit between now and December, and collect the remainder when income taxes are filed early next year. For a family with two dependent children between the ages of 6 and 17, the monthly payment will be $500. Therefore, this family will collect $3000 of the $6000 credit they are eligible to receive. Sounds great, right! In general, yes. It is better to have the government send money now so that you can choose how to use it. But there is a downside to this method.
Last year, this family would have claimed a $4000 child tax credit when filing their income taxes. In 2021, they will receive advanced payments totaling $3000, leaving only $3000 to be applied to their income tax filing. This is a $1000 reduction in the credit applied at filing time when compared to tax year 2020. For families who generally receive small refunds or who sometimes owe a tax bill, this could pose a significant impact. This means your refund will be reduced by $1000 or your tax bill will be increased by $1000.
I work with many clients who have taxes regularly withheld from their payroll, but it’s not always enough.
Now is a great time to look at your income tax withholdings year-to-date. It will help you determine if you can use your advanced payments elsewhere, or if they need to be saved to pay a tax bill next year. Click here to book your complimentary consultation.
All my best,
Christina Gatteri, CFP
Certified Financial Planner
Warwick, Rhode Island 02886