Due to the American Rescue Plan Act passed in March, most families with children under 18 will get a minimum of a $3,000 tax credit for each child. For any child younger than six, the amount rises to $3,600.
Not only is the tax credit higher than in years past, but for the first time, instead of needing to wait until the end of the year to claim the credit on your tax return, you can get part of it up front in monthly installments. Those monthly payments start July 15 and end in December, and they will add up to half the total credit you’re entitled to.
Let’s say you are the parent of a 10-year-old and eligible for the full credit, you’d get $1,500 by the end of this year and $1,500 after filing your taxes next year.
The law’s intent is to deliver pandemic relief as quickly as possible. President Joe Biden argued that the tax credit, along with other measures in the American Rescue Plan Act, could reduce child poverty by half.
The tax credit is uncomplicated for many taxpayers, but there are a couple of potential issues that some people may want to note.
Overview of the tax credit
Generally speaking, the new payments — which so far are only in place for 2021 — are paid even if you don’t make enough to owe taxes. These are tax credits, not income. They reduce your tax bill, and are not taxable.
By law, the IRS will start direct deposits, or sending checks, to taxpayers based on their 2020 tax returns. For each child age 5 or under, the IRS will send $300 a month. For each child between the ages of 6 and 17, the amount will be $250.
The tax credits begin to phase out for couples filing jointly who make over $150,000 and individuals who make over $75,000. For all the details, the IRS has a useful set of FAQs. There’s also an eligibility questionnaire to help people find out whether they qualify for the tax credit.
The monthly advance payments create the possibility that some households could get more than they are due, and the IRS would be owed back the difference. This could happen under a few scenarios.
The payments that go out are estimated using 2020 income, but at the end of the day, it’s 2021 that matters. If a couple’s adjusted gross income went from $149,000 in 2020 to $151,000 in 2021, they would be eligible for slightly less than the full amount, and would need to account for that when filing their 2021 taxes.
Other changes could also reduce a household’s eligibility. If, for example, a child moves away to live with another parent in a divorced couple, or if a person’s primary home shifts overseas for more than half the year, the tax credit could be affected.
Whether these household changes would trigger writing a check to the IRS depends on everything else beyond the child tax credit that affects a family’s total tax bill.
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For taxpayers who want to avoid any risk of overpayment, the IRS has a page to make changes in their filing details, and, if they like, opt out of the monthly deposits.
End of year refund
The American Institute of Certified Public Accountants, a professional trade group, wrote that some people might do better to opt out of the monthly payments. If taxpayers think the amount they will owe is more than the value of the tax credit (if say, a couple’s adjusted gross income rose well beyond $150,000 in 2021), it could make sense to wait until they file their tax return in 2022 to do the final accounting.
The Utah-based firm JB Accounting and Tax urged people to think through their options. Owner Jake Bassett warned that those who count on getting a refund at the end of the year could be unpleasantly surprised. The child tax credits paid each month would reduce the total refund at filing time.
But that is a matter of personal preference. The total amount of the tax credit remains the same whether taken monthly or all at once.