The American Rescue plan was passed on March 11, 2021 to aide with the havoc caused by the COVID-19 virus. Below is a summary of how the child tax credit was affected and answers to some of the most common questions we have received:
The Original Child Tax Credit:
Parents of children under age 17 can recognize a $2,000/kid tax credit. For low-income households with at least $2,500 of income, up to $1,400 of that tax credit is refundable.
Parents making over $200,000/year single or $400,000/yr Married filing joint do not qualify.
2021 American Rescue Plan:
Dependent age increased 1 year: All kids under 18 now qualify
Tax Credit increased: credit is now $3,000/kid aged 6 and older or $3,600/kid aged 5 or younger.
Credit is fully refundable and does not have a $2,500 income limitation
You will start receiving cash from the tax credit in July through December. 50% of the credit will be paid in advance via monthly payments beginning July 2021. The remaining 50% will be reconciled on your 2021 tax return. For qualified families, payments for kids under 6 will be $300/kid per month; 6+ will be $250/kid/month.
Phase out of the American Rescue Plan credit begins at $75,000 annul income for single parents and $150,000 married filing joint. The total benefit is reduced by $50 for each $1,600 over the threshold.
Q. I am married filing joint and make $200,000. In the past I have always qualified for the child tax credit but am above the $150k threshold now. Do I still get any tax credit?
A. Yes! For households between the new and old threshold (150k – 400k) you can still take full advantage of the original child tax credit and deduct up to $2,000/kid from your tax due on your 2021 return.
Q. Is this just for 2021 or is it the new Child Tax Credit
A. So far, this just covers 2021.
Q. If I receive the tax credit payments in July but have had an income increase and know I won’t qualify do I have to pay it back?
A. Qualification or amount of qualification is determined off your most recent filed tax return. (2020 if you did not file an extension 2019 if you did file a 2020 extension). No specific policy has been released on the Child tax credit, but if it follows a pattern similar to other COVID assistance measures, if your income changed enough to change your qualification you will not have to pay the credit back.
Q. How do I make sure I receive my payments?
A. If you received a refund on your 2020 return via direct deposit you should receive your tax credit in a similar manor. If you have been receiving your stimulus payments the Child Tax Credit should follow a similar manor. If you have not been receiving them, you will be made whole upon filing your 2021 tax return. A portal is currently underway from the IRS allowing individuals to view and update the information (personal address, bank, and dependents) on file. This will be key to watch if you are pregnant gaining a dependent, have never filed a tax return due to low income or have changed banks/addresses.
Q. I have a dependent child with disabilities that is 30 years old. Will he qualify for the American Rescue Plan Credit?
A. This has not been specifically stated in the new language of the American Rescue Plan, but historical child tax credit law allowed benefit for parents of person(s) with disabilities who cannot dress, clean, or feed themselves because of physical or mental limitations.
Q. Do I qualify for the American Rescue Plan tax credit if I live in a US Territory or Puerto Rico?
A. While unusual for federal benefits, with this one- Yes! Your family qualifies!
For additional questions, follow the IRS publications on Advance Child Tax Credit Payments in 2021.
Q. I have to pay tax every year. Can I opt out of the monthly check so I can receive a larger write off?
A. Yes! The IRS will have a website to Opt out of advance payments in and receive a single lump sum instead.
Q. Are there any other benefits for families?
A. Yes! The American Rescue Plan also allows up to 50% of childcare related expenses to be deducted. A single dependent family is limited to a max of $8,000 deduction. A 2+ Dependent family may have up to $16,000 (this is up from 2020’s $6,000 max) deducted. This credit is fully refundable in 2021. There is no advance on this deduction.
– Erin Ames, CFP®, CEP®, CPA, Financial Planning Specialist
To learn more about the author of this article Erin Ames, CFP®, CEP®, CPA, visit: https://www.adamswealthadvisors.com/erin-ames-profile. Or connect with her on LinkedIn: https://www.linkedin.com/in/eringerraereed/.
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