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Child Tax Credit for 2021

Home » Windward Passages » Child Tax Credit for 2021

Child Tax Credit for 2021

Posted on: July 15, 2021

Recently, there were temporary changes made to the child tax credit that will benefit many taxpayers. As part of The American Rescue Plan Act of 2021, that was enacted in March 2021, the child tax credit has increased in amount, is fully refundable, and may be partially received in advance through monthly payments starting July 15th. Though these tax changes are temporary and only apply to the 2021 tax year, they may present important cashflow and financial planning opportunities today.

Increase in credit amount

For 2021, the child tax credit amount increases from $2,000 to $3,000 per qualifying child ($3,600 per qualifying child under age 6). The partial credit for other dependents who are not qualifying children remains at $500 per dependent.

Ages of qualifying children

The legislation makes 17-year-olds eligible as qualifying children in 2021. Thus, children age 17 and younger are  eligible as qualifying children in 2021.

Phaseout of credit

The combined child tax credit (the sum of your child tax credits and credits for other dependents) is subject to phaseout based on modified adjusted gross income (MAGI). Special rules start phasing out the increased portion of the child tax credit in 2021 at much lower thresholds than under pre-existing rules. The credit, as reduced under the special rules for 2021, is then subject to phaseout under the pre-existing phaseout rules.

The following table summarizes the effect of the phaseouts on the child tax credit in 2021, based on MAGI.

Single/Married filing separately Married filing jointly Head of household Combined credit
       
Up to $75,000 Up to $150,000 Up to $112,500 No reduction in credit
$75,001 to $200,000 $150,001 to $400,000 $112,501 to $200,000 Credit can be reduced to $2,000 per qualifying child, $500 per other dependent
More than $200,000 More than $400,000 More than $200,000 Credit can be reduced to $0

Refundable credit

The aggregate amount of nonrefundable credits allowed is limited to tax liability. With refundable credits, a taxpayer may receive a refund at tax time if they exceed tax liability.

For most taxpayers, the child tax credit is fully refundable for 2021. To qualify for a full refund, the taxpayer (or either spouse for joint returns) must generally reside in the United States for more than half of the taxable year. Otherwise,  under the pre-existing rules, a partial refund of up to $1,400 per qualifying child may be available. The credit for other dependents is not refundable.

Advance payments

Eligible taxpayers may receive periodic advance payments for up to half of the refundable child tax credit during 2021, generally based on 2020 tax returns.  The U.S. Treasury will make the payments between July and December 2021. For example, monthly payments could be up to $250 per qualifying child ($300 per qualifying child under age 6).

If you are eligible to receive advance Child Tax Credit payments based on your 2020 tax return or 2019 tax return, you generally will receive those payments automatically without needing to take any additional action. You must act if you have not filed your 2020 tax return or 2019 tax return. The IRS has an online Non-Filer tool that allows individuals who weren’t required to file (and have not filed) to register for advance Child Tax Credit payments.

If you do not want to receive monthly advance Child Tax Credit payments because you would rather claim the full credit when you file your 2021 tax return, or you know you will not be eligible for the Child Tax Credit for the 2021 tax year, you can unenroll through the Child Tax Credit Update Portal (CTC UP).

In early 2022, the IRS will send you Letter 6419 showing the total amount of advance Child Tax Credit payments that were disbursed to you during 2021. Keep this letter regarding your advance Child Tax Credit payments with your tax records. You may need to refer to this letter when you file your 2021 tax return during the 2022 tax filing season.

With any tax law change, it’s important to revisit your financial plans. We can help you determine how much credit you may be entitled to and whether advance payments are appropriate. How you choose to receive the credit (partially advanced via monthly payments or solely on your next year’s return) could have many impacts to your financial plans.  Contact us if you have any questions about how this may impact you.

 

 

Sources

Broadridge Investor Communication Solutions, Inc. Copyright 2021

IRS.gov accessed July 15, 2021 https://www.irs.gov/credits-deductions/2021-child-tax-credit-and-advance-child-tax-credit-payments-topic-a-general-information

 

This content is provided by Windward Private Wealth Management Inc. (“Windward” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. No portion of this blog is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax or legal advice. Certain information contained in the individual blog posts will be derived from sources that Windward believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages.

Windward is an SEC registered investment adviser. The Firm may only provide services in those states in which it is notice filed or qualifies for a corresponding exemption from such requirements. For information about Windward’s registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov.

Filed Under: Budgeting, Cash & Debt Management, Building Wealth, Getting Started, Income Tax Planning, Recent Posts

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Windward Private Wealth Management Inc. is an SEC registered investment advisor. Past performance is no guarantee of future results. All securities involve risk and may result in a loss. *We do not provide legal services. These services are rendered at client request in coordination with legal counsel. Legal services will be billed by the provider and are separate from our fees. We do not sell insurance products. These products may be purchased at client request in coordination with insurance agents. Insurance agents are responsible for recommendation of all insurance products. Windward does not guarantee the performance of any insurance product purchased.
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Our last day at 2101 Burlington is 1/27/2023. Our new office is being renovated and will open between 2/15-3/1/2023. Our new address will be: 851 NW 45th St., Suite 106 Kansas City, MO 64116