You may have noticed an unexpected deposit in your bank account (or check in your mailbox) last month from the Federal Government — the first installment of six advance Child Tax Credit payments to come. Congress increased the credit from its previous level of $2,000 per child to a maximum of $3,600 per child.
Key takeaways of the Child Tax Credit:
- The increased Child Tax Credit amount is only for 2021 and advance payments will only be made through December, so be prepared for deposits to stop January 2022.
- The amount of Child Tax Credit your family receives is based on the number of children you have, their ages, and your income.
- Be aware that the Child Tax Credit may impact your taxes when you file in 2022, potentially reducing your refund or increasing the amount of tax you owe.
Tax credits for families with children are nothing new, but this year’s advance payments have some unique nuances.
Families can expect to receive five more payments before the end of the year, which represent half of the estimated total credit owed. Any remaining credit will be determined once taxes are officially filed for 2021. Payments are being sent to the bank account on record with the IRS (where your refunds have been sent) or mailed if an account is not on file.
How was my Child Tax Credit calculated?
The first consideration is a child’s age, with each child 5 and under eligible to receive a maximum tax credit of $3,600, and children ages 6-17 receiving up to $3,000.
Here is how this breaks down:
- A monthly payment could be as much as $300 for a child 5 and under ($3,600/2 = $1,800, split into 6 equal payments of $300) and/or
- $250 for children ages 6-17 (same calculation using a $3,000 maximum credit).
Why was the Child Tax Credit I received so much smaller?
The Child Tax Credit is subject to income phase outs, meaning higher income households could receive reduced payments or none at all. The estimated payments are based on household income reported on the most recently filed tax return.
There are two levels of phase outs based on income–the first can reduce 2021’s “special” one-time Child Tax Credit and the second can reduce the regular $2,000 Child Tax Credit. The phase outs can be confusing, so here’s a breakdown:
| Filing Status | MAGI Subject to Phase Out 1 (additional 2021 credit) | MAGI Subject to Phase Out 2 (regular $2k credit) |
| Single | $75,000 | $200,000 |
| Married | $150,000 | $400,000 |
| Head of Household | $112,500 | $200,000 |
Each phase out level reduces the Child Tax Credit by $50 for each $1,000 by which income exceeds the threshold for a given tax filing status. For example, a married couple earning $250,000 would probably not receive any additional Child Tax Credit for 2021 but would still qualify for the regular $2,000 credit, receiving a portion of it through upfront payments.
Is the Child Tax Credit going to impact my taxes?
Because the Child Tax Credit is an estimated upfront payment, you may be in for a surprise when it comes time to actually file your 2021 tax return.
If this year’s income ends up higher than 2020’s, you could end up paying back some or all of the credit when it comes time to file, resulting in a smaller refund than expected or even owing money to the IRS.
The converse also holds true. If you experience a drop in income this year but receive a smaller Child Tax Credit based on 2020’s higher income, you’ll receive a larger credit amount when tax time rolls around.
For many families, income levels for the remainder of the year may still be unclear. If you’re concerned about potentially exceeding last year’s levels and want to minimize the risk of a surprise at tax time, we recommend opting out of Child Tax Credit prepayments.
To opt out, use the IRS’s Child Tax Credit Portal, which involves setting up an online account with the IRS and verifying your identity. Be prepared — the process requires uploading a copy of your driver’s license or passport and can be rather glitchy. Also, if you are married, both you and your spouse will need to unenroll from advance payments to shut off the tap completely.
Help for Families
With nearly 1 in 7 children in the U.S. living in poverty, this year’s increased Child Tax Credit will be a lifeline for many struggling families. For those in a more fortunate position, having an understanding of how you might be impacted and the steps you can take to avoid a surprise at tax time is valuable.
Want to talk more about your specific situation? Reach out to us today.
