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Child Tax Credit 101 – What You Need to Know

Thanks to the American Rescue Plan Act of 2021, the child tax credit has been temporarily expanded to eligible taxpayers with at least one qualifying child. To parents across the nation, this is welcome news. But as with any sudden change in tax law, the details may be hard to understand. Eligible parents across the country are wondering what the plan means to them, whether they should accept payments, or if they even qualify for payments in the first place.

To clear up a few of the most pressing questions, we need to understand both the finer and broader points of the expanded child tax credit program. To many parents  the child tax credit offers valuable assistance, but for some, it may not be the blessing it’s intended to be. To figure your way through the expanded child tax credit, let’s start with the basics.

What’s New?

Beginning July 15, 2021, eligible taxpayers could receive up to 50% of the estimated amount of the child tax credit they would be entitled to claim on their 2021 tax return. These payments will be made monthly starting in July 2021 and continuing through December 2021.  The payments are automatic and are a partial advance on the child tax credit that previously was only available to taxpayers at the time a tax return was filed.  

To put it in basic terms: while you would normally have received this credit when filing your taxes, you will now receive half of  the credit in the form of monthly payments up until December 2021. 

What are the Benefits? 

The changes made by the American Rescue Plan Act were intended to provide immediate assistance to families in need, but there are additional benefits and details beyond the monthly payments, including:

  • Half now, Half Later – Eligible taxpayers can now receive half of the estimated 2021 credit in advance and will claim the rest on their 2021 tax return.
  • More Money – The credit amount has increased from $2,000 to $3,600 for ages 5 and under and up to $3,000 for ages 6 to 17.
  • Greater Range – The age limit now includes 17 year olds who were previously excluded.
  • Fully Refundable – Previously the $2,000 credit was limited to a refundable amount of $1,400. For 2021, the new credit can be fully refundable for most taxpayers.

If the IRS has already processed your 2020 tax return, your eligibility and amounts are based on the information included with that return. If your 2020 tax return has not yet been filed, then the IRS will use the information reported on your 2019 return.

Taxpayers will receive the maximum credits if their modified adjusted gross income amounts are as follows:

  • $75,000 or less for singles/married filing separate
  • $112,500 or less for heads of households
  • $150,000 or less for married filing joint/qualifying widows and widowers

Should You Accept It?

Taxpayers should consider their unique tax situations before deciding to receive the monthly payments. In certain circumstances, some families may prefer to opt out.

For example, if a taxpayer expects to have an increase in income for the 2021 year that could possibly make them ineligible for the full amount of the child tax credit, they should consider opting out of the monthly payments in order to prevent the need to repay these amounts when filing their 2021 tax return.

Additionally, if a taxpayer typically receives a refund when they file their taxes, they need to consider that their refund may be reduced if they have been receiving the monthly payments rather than receiving the full credit when they file their return.

Finally, if a taxpayer knows that they will most likely not qualify for the child tax credit, or will qualify for a reduced credit for 2021, but still choose to receive the advanced payments, they run the risk of possibly having to repay these amounts to the IRS when they file their 2021 tax return.

If you’re uncertain about your individual tax situation as it relates to the expanded child tax credit, the best thing you can do is speak to a trusted tax advisor. 

Next Steps

If you and your advisor decide  the enhanced child tax credit is not beneficial to your tax situation , you can unenroll from receiving the payments using the online tool at the IRS website. If a taxpayer needs to update their banking information, mailing address, expected income for 2021 or a change in family status, they can access the Child Tax Credit Update Portal (CTC UP) on the IRS website

Taxpayers can find further information and answers to their questions using the tools and guidance provided on the IRS website. The IRS has a useful frequently asked questions section that covers a wide range of common questions.

Asking for Help

When we’re uncertain about our unique finances and taxes, it’s best to ask a trusted tax advisor for guidance. You don’t have to go it alone when determining whether the expanded child tax credit will be of personal use to you. Reach out to our  professionals and let them help you make sense of the enhanced tax credit and how it applies to your unique situation.

To learn more about the child tax credit, Contact Aldridge Borden 

In the best of times, long-standing tax policy can be hard enough to understand. But during difficult moments when tax policies evolve to meet the needs of a nation, figuring out how the changes affect you can be even more challenging. The good news is you don’t have to go it alone. To understand the child tax credit and how it applies to your situation, call Aldridge Borden today at (334) 834-6640.

Rena Minton, CPA (left) & Callis Blake, CPA (right) – Aldridge Borden’s Child Tax Credit Experts
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