2021 Child Tax Credit and Payments: What Your Family Needs to Know

An expanded child tax credit and direct payments to families for 2021 were made law by the American Rescue Act of 2021. For families with children, this marks a big change in how the tax code affects your family. You might be wondering about "advance payments" and what it all means. Keep reading for our take on what this change means for your family and what to do next. 

"Wealth is a crown for the wise; the effort of fools yields only foolishness." Proverbs 14:24

Background of Child Tax Credits in the United States

The concept of a child tax credit has been around since the late 1990s. The specific rules and amounts have changed a number of times since then. Generally, the credit has gone up over time.

What Are Tax Credits?

Simply put, tax credits are reductions on the amount of actual tax owed. Tax credits in no way affect your tax bracket or taxable income. Instead, think of these as reductions that come after the fact - i.e. after you’ve determined how much is owed to the government. Note this is different from a tax deduction or “write-off.” Tax credits are typically either refundable or non-refundable. Depending on which type of credit it is, this will affect how much you could receive back on your tax refund.

More on the difference between a tax credit and a tax deduction

Refundable Tax Credits

Refundable tax credits are tax credits that allow you to be refunded the remaining, unused portion of a credit. For example, say you owe $900 in taxes, but your eligible child tax credit is worth $2,000. Not only will this cover the $900 you owe in taxes, but you will also be refunded the remaining $1,100. It’s important to note that in recent years, certain tax credits have been reformed to include caps on the amount of refundable credit given.

Non-Refundable Tax Credits

Alternatively, non-refundable tax credits will only cover the amount in taxes you owe, up to the credit’s limit. If there is more in the credit amount than what you owe, you do not receive the excess amount in the form of a tax refund. For example, if you owe $900 in taxes and your tax credit is worth up to $2,000, the $900 will be covered but you will not receive the additional $1,100. 

American Rescue Plan Act (ARPA) of 2021

The American Rescue Plan Act, passed in March 2021, brought significant changes to the child tax credit for 2021. ARPA altered the 2021 rules for the child tax credit in several ways. The amount of the credit was increased, a broader definition of qualifying child was instituted, refund options expanded, and the concept of an “advance payment” was introduced for the first time. As it stands right now, the rules apply to 2021 only.

The increased child tax credit for 2021

For qualifying children, the amount of the child tax credit was increased for 2021. The IRS will look at the age of your child as of the end of 2021. The amount of the credit is $3,600 for each child under the age of 6 and $3,000 per child between the age of 6 and 17. This includes any children born in 2021. The amount could be reduced or eliminated depending on your household’s income. The credit for 2021 is also refundable (see-above for how that works) which means you could get money from the IRS even if you don’t owe tax.

Eligibility for your household

As with any part of the tax code, there's criteria about who does and does not qualify. 

Who is eligible?

To be eligible for the child tax credit, a child in your family must meet these criteria:

• The child is claimed on your tax return
• 17 or younger at the end of 2021
• Live with you for at least 6 months during the year
• Have a Social Security number
• Is a United States citizen or US Resident Alien

Income (Adjusted Gross Income) Limits for the 2021 Child Tax Credit

The IRS rules for 2021 will use a number the IRS calls your Adjusted Gross Income or AGI. You can find this number on your form 1040 (the first page) of your tax return. If your family files married filing jointly (MFJ), then you will receive full credit amounts per child if your AGI is below $150,000. For $150,000 and above, the amount will begin to decrease and eventually be eliminated once your income is high enough.

Check your form 1040 for "adjusted gross income"

Advance Payments for the 2021 Child Tax Credit

Part of the American Rescue Plan changes to the child tax credit for 2021 include an advance payment of the child tax credit. The IRS was instructed to pay 50% of what they expect you to receive for a child tax credit out over the second half of 2021. Keep reading for more specifics on how it will work.

Income and Advance Payments

In addition to the per child criteria, your family’s income from your most recently filed tax return will be used to determine eligibility. For most families, this will be your family’s income for the 2020 tax year. Your household’s adjusted gross income or AGI, if high enough, could result in a reduced advance payment or possibly no payment at all.

Dates are approximated-Your situation may vary

How will the advance child tax credit payments work?

For families that the IRS deems as meeting the criteria, they will receive a payment on the 15th of every month (barring weekends and holidays). This will be done monthly from July to December of 2021. If the IRS has your bank information (usually from a tax refund), then they’ll use direct deposit. If you filed your 2020 taxes and provided your checking account for a refund, then this is most likely the information the IRS will use for your family.

Important Situations to Know about the 2021 Child Tax Credit

Children born or adopted in 2021

If you have a child born in 2021, even on New Year’s Eve, you could qualify for the child tax credit for 2021. Keep in mind qualifying for the credit and qualifying for the advance payment are different things. For example, if you have a child on December 31, then they would not qualify for the advance payment. They would, however, qualify for the credit. Your family would file this as part of your 2021 taxes and receive a refund as part of your normal tax filing process, assuming all the other criteria like income are met.

My Family’s Income will be Much Higher for 2021 than 2020

Since the IRS is using your 2020 tax return to determine eligibility for the advance payments, they could send your family a payment when a factor like higher income means you’re actually not eligible for the full amount or not at all. If you receive an advance payment when you don’t qualify for some or all of the credit, you could “owe” the money back to the IRS. In this situation, you would reconcile this when you file your 2021 taxes. Since this is one of many factors on your family’s tax return, it’s possible an “overpayment” of the credit could be balanced out by other parts of your return anyway. The IRS has said taxpayers will have the option to decline the payment via the IRS website. This could be an option for those who don’t want to “owe” Uncle Sam. Given the complexities, this would be a good scenario to consult with a fiduciary financial advisor or qualified tax professional.

My Family’s Income will be Much Lower for 2021 than 2020

Since the IRS is using your 2020 tax return to determine eligibility for the advance payments, they could determine your family is not eligible for the advance payments. If your family is eligible based on a lower 2021 income, you will still receive the child tax credit you are due, just at a later time. Most families in this situation will receive the credit as part of the normal 2021 tax filing process. Families in this situation will likely just receive a large refund in the spring of 2022. As always, this is just one factor of many for your overall tax return. Given the complexities, this would be a good scenario to consult with a fiduciary financial advisor or qualified tax professional.

My family owed taxes when we filed for 2020

Given larger size of the child tax credit for 2021, there is the potential for some families that owed tax for 2020 to end up owing much less or receiving a refund for 2021. As always, taxes are complex and this is one of many factors. This does have the potential, however, to be a big benefit some families that have written the IRS a check in the past. Given the complexities, this would be a good scenario to consult with a fiduciary financial advisor or qualified tax professional.

Scenarios and Examples for Advance Payments and the Child Tax Credit

All scenarios assume the following:

• The family files their taxes as Married Filing Jointly (MFJ)
• All references to income are Adjusted Gross Income (AGI)
• All age references are as of December 31, 2021
• The IRS follows their own rules and makes no mistakes 🙄
• 2020 tax return was filed on time
• These scenarios are simplistic in nature. Our tax code is very complex so your experience could differ based on other factors. 

Scenario #1

What happens? 

This family can expect to receive $800 monthly from July to December of 2021. The family will then claim $4,800 as a credit on their 2021 taxes when they file in 2022. 

Scenario #2

What happens?

This family can expect to receive $500 monthly from July to December of 2021. The family will then claim $3,000 as a credit on their 2021 taxes when they file in 2022. 

Scenario #3

What happens?

This family can expect to receive $250 monthly from July to December of 2021. The family will then claim $1,500 as a credit on their 2021 taxes when they file in 2022. 

Scenario #4

What happens?

This family can expect to receive $1,400 monthly from July to December of 2021. The family will then claim $8,400 as a credit on their 2021 taxes when they file in 2022. 

Scenario #5

What happens?

This family can expect to receive $250 monthly from July to December of 2021. The family will then claim $1,500 as a credit on their 2021 taxes when they file in 2022. This family only receives a credit for one child because the oldest is 18. 

Scenario #6

What happens?

This family can expect to receive $333 monthly from July to December of 2021. The family will then claim $4,002 as a credit on their 2021 taxes when they file in 2022. 

Scenario #7

What happens?

This family can expect to receive no amount monthly from July to December of 2021. The family will then claim $3,600 as a credit on their 2021 taxes when they file in 2022. 

What to do with a monthly Child Tax Credit Advance

If your family is eligible to receive a monthly payment, use it wisely. This means two things. First, use a portion or all of the payments to make decisions that will benefit your family well beyond 2021 (More on this below). Second, don't get addicted to money showing up in your checking account. Be careful and don't get used money showing up in your checking account with an inflated lifestyle. 

"The plans of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty." Proverbs 21:5 ESV

5 Smart ways you can use your family's monthly advance for long term benefit

1. Pay down high interest debt like credit cards or student loans
2. Start or add to retirement savings
3. Start or shore up your family emergency fund
4. Start or add to college savings like a 529 plan
5. Set aside money for medium to large medical expenses like a future child or braces

If you're like help figuring out how to use these resources to benefit your family for years to come, we can help. We help Christian families to help them make wise decisions like these and many others. Take the first step and get some help. 

We help Christian families on their journey to financial freedom. If you would like more posts from us on how to balance what's truly important with your finances, please sign up for our free newsletter. If you’d like to hear more about how Intrepid Eagle Finance helps families manage their financial lives, click here to learn more and schedule a free consultation.