It’s often said that the only two certainties in life are death and taxes; one could probably also add that not only are taxes a certainty, so is Congress’s tendency to make regular changes to tax laws. This year is no different, though. Major adjustments to tax policy are not surprising with a change in presidential administrations and the continued economic hardships caused by COVID-19. One particular change that should be of interest to many households is the Advance Child Tax Credit, which will be limited to the 2021 tax year.
What Is the Child Tax Credit?
The Child Tax Credit is known as a “refundable tax credit” paid to parents for each child under the age of 18. It is refundable because if your overall tax bill is lower than the total amount of the credit, you will receive the remaining balance in the form of a tax return payment. For example, if your total tax for the year was $4,000, and your total Child Tax Credit was $7,200, you would receive a tax return of $3,200.
This is different from deductions, which reduce your income figure (and thus your total tax), and non-refundable tax credits, which can reduce your tax bill to zero but don’t entitle you to a refund. The Child Tax Credit is a very good deal for parents.
What’s Different in 2021?
The tax credit will be different in two important ways. First, the default amount of the credit has been raised from $2,000 per child to $3,600 per child. Second, this year the IRS will be paying 50% of the credit in monthly payments from July to December 2021. The result is that parents will be receiving checks through the end of the year, but the tax credit they receive when filing their tax return in 2022 will be reduced by half.
Who Will Receive the Advance Child Tax Credit?
The Advance Child Tax Credit will go out automatically to anyone who meets the following conditions:
- (a) Filed a tax return in 2019 or 2020 OR (b) didn’t file but gave your income information in 2020 to receive an Economic Impact Payment (stimulus check)
- Had your main home in the United States for more than half the year, or file jointly with someone who did
- Have a child who will be under 18 at the end of 2021 and who has a Social Security number
- Have annual income under a certain amount (the amount of the credit goes down starting at $75,000 annual income for single filers, $112,500 for heads of households, and $150,000 for joint filers)
Parents who meet these conditions should receive a monthly check with no further action. If you neither filed a return in 2019 or 2020 nor gave the IRS your information to receive a stimulus check last year, you can still qualify for the Child Tax Credit. You must first either file a normal tax return or a simplified return available on the IRS website.
If you don’t want to receive the advance payments and prefer the larger tax credit when you file your return next year, you must notify the IRS.
Experienced Tax Attorneys in Southern California
State and federal tax policy is constantly changing, and it’s important to have help from a tax expert to make sure you are gaining the maximum benefit and minimizing your tax bill. Schedule a consultation today, and we’ll help you get the most from your Child Tax Credit and other programs.