CHANGES IN THE CHILD TAX CREDIT FOR 2021 FILING

The past 15 months have been challenging for many Americans. There have been changes to all facets of life and tax law has not been exempt from these changes. One such change that could have an impact on many taxpayers’ 2021 returns is the Child Tax Credit. Another is the third round of stimulus checks being issued to some taxpayers based on their 2020 tax returns.

In an effort to make things a little easier for families whose finances have been negatively impacted by Covid-19, the American Rescue Plan Act of 2021 has significantly increased the Child Tax Credit for one year. The IRS is required to make advanced payments to qualifying families in the second half of 2021.

The American Rescue Plan now allows, for tax year 2021 only, 17-year-old children to qualify for the credit, which is increased to $3,000 ($3,600 for children under 6) for many families. The credit will be fully refundable and there is no longer an earned income requirement to claim the refundable credit. It also requires that the IRS send monthly payments to qualifying families from July 2021 to December 2021.

IRS Payments for Qualifying Families This Year

The IRS will begin sending out monthly payments to qualifying families beginning on July 15, 2021. Most taxpayers will receive their payments through direct deposit. If the IRS does not have your banking information on file, they will send either paper checks or debit cards through the mail.

They will base eligibility for the credit and advance payments based on previously filed tax returns. They will look first to your 2020 return, but if that has not yet been filed, they will look at 2019.

What Families Are Eligible?

The general rules for Child Tax Credit eligibility still apply. The child(ren) must be a US citizen, national or resident alien and have a Social Security number. He or she must also be claimed on your tax return, must be related to you and generally, must live with you for at least six months during the year. The enhanced credit begins to phase out at $75,000 on single returns; $112,500 on head of household returns and $150,000 on joint returns. Most eligible families will not have to take any action to get these payments.

The IRS will issue procedures for families who are not required to file tax returns.

What About Babies Born in 2021?

If you have had a baby in 2021, any changes with the IRS will be accounted for when filing your 2021 tax return. The IRS has developed an online portal so that you can update your information before filing your 2021 return to receive the advanced payments. Please contact us if you would like more information on this by calling 484-368-3183.

How to Opt Out of the Child Tax Credit

On Tuesday June 22nd, the IRS offered an online tool that allows families to opt out of the advance monthly payments from the enhanced child tax credit, scheduled to start next month.
Opting out means that eligible families will receive the entire credit as a lump sum when they file their 2021 tax return next year.
Taxpayers may choose to opt out if:

• They expect income in 2021 to be higher than in 2020.
• There is a change in dependents in which they are eligible to claim in 2021.
• The monthly payments are disrupting the tax plan that the family has in place.

If you’d like to opt out, visit the IRS portal at the link button below:

What to Expect

While these advance payments are not taxable income, they will reduce the Child Tax Credit allowable on your 2021 return. The IRS is required by law to issue a notice in January 2022 of all advanced payments received.

Eligibility for the Third Round of Stimulus

Some taxpayers were not eligible for a third-round stimulus check, based on their 2019 tax return. However, if 2020 income was lower, some taxpayers who didn’t receive the Economic Impact Payment, may now be eligible. Generally, someone is eligible for the full amount of the third stimulus check if they:

• are a US citizen or a US resident alien (and their spouse, if filing a joint return)
• are not a dependent of another taxpayer, and
• their adjusted gross income is not more than:
  • $150,000 if married and filing a joint return or if filing as a qualifying widow or widower 
  • $112,500 if filing as head of household, or 
  • $75,000 for eligible individuals using any other filing status

How to Check Your Third Stimulus Status

Taxpayers can check the status of their third Economic Impact Payment or “plus-up” payment with Get My Payment at the button link below:

If you have any questions about either the Child Tax Credit or your stimulus payment, call us at 484-368-3183.

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