The IRS has announced that there will be significant changes to the Child Tax Credit beginning in July 2021.
CHILD TAX CREDIT 101
The IRS has announced that there will be significant changes to the Child Tax Credit beginning in Summer 2021. These changes aim to help families who may need additional financial assistance, especially for those who struggled financially through the COVID-19 pandemic.
Most importantly, for the 2021 tax year, families claiming the Child Tax Credit will now receive up to $3,000 per qualifying child between the ages of 6 and 17 and $3,600 per qualifying child under six at the end of 2021. This is a substantial increase from the previous Child Tax Credit of $2,000 per qualifying child under age 17.
The increased amounts are reduced and phased out for incomes over $150,000 for married taxpayers filing a joint return and qualifying widows or widowers, $112,500 for heads of household, and $75,000 for all other taxpayers.
Another significant change to note is that 50 percent of the 2021 Child Tax Credit will be offered as a monthly payment from July through December to eligible taxpayers who live in the United States for more than half the year.
The most important thing to keep in mind is that the child tax credit is not like the rounds of stimulus payments from the past year. These monthly payments are coming out of the sum of a family’s Child Tax Credits. In previous years an eligible family would only receive the Child Tax Credit money the following year when an income tax return is filed. You will now claim the other half of the Child Tax Credit when you file your 2021 income tax return.
Eligible taxpayers do not need to take any action now other than to file their 2020 tax return if they have not done so.
There are many questions about the new changes to the Child Tax Credit and the advance payments, and we will keep you up-to-date and as updates and more information become available.
Am I eligible for the Child Tax Credit?
Head to the Advance Child Tax Credit Eligibility Assistant to determine if you are eligible for advanced payments or use the below calculator.
When will the payments begin?
Eligible families will begin receiving monthly payments on July 15. Most payments will be directly deposited into bank accounts on the 15th day of July through December. If the IRS does not have bank account information, families could receive paper checks or debit cards in the mail. Payments will be disbursed on a monthly basis through December 2021.
I had a baby this year or had other changes to my dependents. Will I get advance payments?
As part of the American Rescue Plan, the IRS plans to develop an online portal for parents to update information, including the number of qualifying children. More details on how to take these steps will be announced soon by the IRS, but their goal is by July.
I don’t want to receive advance payments. Can I unenroll?
Eligible taxpayers who do not want to receive an advance payment of the 2021 Child Tax Credit will have the opportunity to decline to receive advance payments. There may be several reasons why unenrolling from the monthly Child Tax Credit payments may be a good idea for your family:
- You withhold just enough taxes or tend to owe taxes at the end of the year and would rather claim the full credit when you file your 2021 tax return to offset your tax costs.
- You would rather have one large payment next year after filing taxes instead of smaller payments spanning 2021. Maybe you are saving for a large expense or vacation, or have already budgeted for that money to pay off outstanding debt.
- You know your household circumstances or tax situation will change and feel that updating information with the IRS will be cumbersome. For example, you receive a job promotion that will increase your net income above the taxable income limit.
To opt-out, you can visit the Child Tax Credit Update Portal and click “Unenroll from Advanced Payments”.
Will I pay tax on the payments I receive?
No. The payments are an advanced distribution of the 2021 Child Tax Credit, so they are not taxable.
At First Southern, we believe in planning ahead, especially when it comes to being intentional with your financial matters. We’ve compiled a list of ways to best utilize these payments if you choose to receive them. While these are not all the instances possible for spending these payments we hope this list helps provide ways that will assist with your family’s long-term financial stability.
Meet your family’s urgent needs
For families that struggled financially through the COVID-19 pandemic, these advanced distributions of tax credits can be a lifeline to get finances back on track. The payments should be used immediately to pay things like rent, mortgages, utility bills, groceries and other household necessities.
Pay down debt – especially credit card debt
We love to see our customers and team members live debt-free when possible. For those who carry debt, especially credit cards with high interest, these payments could be an opportunity to pay down debt and minimize the amount of interest accrued. This is the best way to financial freedom.
Start an emergency fund
As the COVID-19 pandemic showed us, unexpected emergencies can happen at any time. A 2020 poll showed that only 25% of U.S. adults had emergency savings. While emergency funds are typically built slowly as excess funds from a budget are set aside and saved, these payments could help quickly start an emergency fund. Find information including a coaching tool and other calculators specific to an emergency fund at https://fsnb.net/finding-funds-in-an-emergency/.
Budget for the future
If you haven’t started a 529 college savings plan or other savings for your kids yet, the additional monthly payments could be a great way to start one.
This could also be a good time to pay ahead on bills or save for future healthcare needs like dentistry, orthodontics, or other future medical expenses.
Perhaps your car is getting older, or you are outgrowing your current home. Use these payments to begin saving with a purpose for a more significant purchase. Set goals and see a monthly breakdown of how to make this happen at https://fsnb.net/saving-with-a-purpose/
You can find out more about the Advance Child Tax Credit Payments in 2021 by visiting https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021. The IRS has also released additional sources of information including, a question and answer page.