The child tax credit is bigger and better than ever for 2021, which should make things a little easier for families taking a financial hit during the COVID-19 pandemic. Thanks to the American Rescue Plan Act of 2021 ("American Rescue Plan"), the credit amount is significantly increased for one year, and the IRS is required to make advance payments to qualifying families in the second half of 2021.
But the changes are complicated and won't help everyone. For instance, there are now two ways in which the credit can be reduced for upper-income families. That means some parents won't qualify for a larger credit and, as before, some won't receive any credit at all. The IRS also has some wiggle room when it comes to the advance payments, so the size and frequency of the payments aren't set in stone yet. More children will qualify for the credit in 2021, too. And, if you have more than one kid, the credit amount could differ from one child to another.
It's all enough to make your head spin. But don't worry – we have answers to a lot of the questions parents are asking right now about the 2021 child credit. We also have a handy 2021 Child Tax Credit Calculator that lets you estimate the amount of your credit and the expected advance payments. Once you read through the FAQs below and try out the calculator, you should feel more at easy about the 2021 credit.
Changes Made for 2021
Question: What changes did Congress make to the child tax credit?
Answer: The American Rescue Plan temporarily expands the child tax credit for 2021. First, it allows 17-year-old children to qualify for the credit. Second, it increases the credit to $3,000 per child ($3,600 per child under age 6) for many families. Third, it makes the credit fully refundable and removes the $2,500 earnings floor. Fourth, it requires half of the credit to be paid in advance by having the IRS send monthly payments to families from July 2021 to December 2021.
Note that the other general rules for child-tax-credit eligibility continue to apply. For instance, the child still must be a U.S. citizen, national or resident alien and have a Social Security number. You also must claim him or her as a dependent on your 2021 tax return, and the child must be related to you and generally live with you for at least six months during the year. And you still have to put the child's name, date of birth and SSN on the return.
Qualifying for the Higher Credit Amount
Question: Do all families qualify for the higher per-child tax credit of $3,000 or $3,600?
Answer: No, not all families with children will get the higher child tax credit, but most will. The enhanced tax break begins to phase out at AGIs of $75,000 on single returns, $112,500 on head-of-household returns and $150,000 on joint returns. The amount of the credit is reduced by $50 for each $1,000 (or fraction thereof) of AGI over the applicable threshold amount. Note that this phaseout is limited to the $1,000 or $1,600 temporary increased credit for 2021 and not to the $2,000 credit.
For example, if a married couple has one child who is four years old, files a joint return, and has an AGI of $160,000 for 2021, they won't get the full $3,600 enhanced credit. Instead, since their AGI is $10,000 above the phase-out threshold for joint filers ($150,000), their credit is reduced by $500 ($50 x 10) – resulting in a final 2021 credit of $3,100.
Question: If my 2021 income is higher than the thresholds for taking the $3,000 or $3,600 per-child tax credit, can I still claim the $2,000 credit when I file my return?
Answer: It depends. Families who aren't eligible for the $3,000 or $3,600 credit in 2021, but who have AGIs at or below $400,000 on joint returns or $200,000 on other returns, could claim the regular credit of $2,000 per child, less the amount of any advance payments they get. Families with AGIs above the $400,000/$200,000 thresholds will see the $2,000 per-child credit reduced by $50 for each $1,000 (or fraction thereof) of AGI over those thresholds.
For example, if a married couple has one child who is seven years old, files a joint return, and has an AGI of $415,000 for 2021, they won't get the full $3,000 enhanced credit. First, because of their high income, they don't qualify for the extra $1,000 (see question above), so their credit is reduced to the regular amount of $2,000. Then, since their AGI is $15,000 above the second phase-out threshold for joint filers ($400,000), their credit is reduced again by $750 ($50 x 15) – resulting in a final 2021 credit of $1,250.
Question: Can I take the higher child tax credit for my daughter who turns 17 in 2021?
Answer: Yes. If you meet all the other rules for taking the child tax credit, you can claim the credit for your daughter when you file your 2021 Form 1040 next year. The American Rescue Plan broadened the age for children qualifying for the credit for 2021 from 16 and under to 17 and under. So, 17-year-olds qualify as eligible children for the child credit for 2021.
Question: What does it mean that the child tax credit is fully refundable for 2021?
Answer: The American Rescue Plan makes the child credit fully refundable for people who live in the United States for more than one half of the year. Before this change, certain low-income people could only get up to $1,400 per child as a refund, instead of the full $2,000 child credit, if their child credit was more than the taxes they otherwise owed. Under the new rules for 2021, people who qualify for a child tax credit can receive the full credit as a refund, even if they have no tax liability.
Parents don't need to be employed or otherwise have earnings in order to claim the child credit for 2021. Prior rules limited the credit to families having at least $2,500 of earned income. For 2021, families with no earned income can take the child credit if they meet all the other rules.
Question: Who gets the advance payments?
Answer: The American Rescue Plan requires the IRS to pay half of the tax credit in advance. IRS will begin sending out monthly payments (mainly in the form of direct deposits) from July through December to eligible families. The IRS will base eligibility for the credit and advance payments, and calculate the amount of the advance payment, based on previously filed tax returns. It will first look to your 2020 return, and if a 2020 return has not yet been filed, the IRS will look to your 2019 return. The IRS will provide procedures for families who are not otherwise required to file tax returns.
Question: When will the IRS start making payments, and how many payments will I get?
Answer: The plan all along was for the IRS to make six monthly credit payments to eligible families from July to December 2021. That doesn't give the tax agency much time to set up its computer systems to handle such a massive program, but the IRS says it will meet that goal. Eligible families will begin receiving monthly payments on July 15. Most payments will be directly deposited into bank accounts on the 15th day of the month from July through December. Families for which the IRS does not have bank account information could receive paper checks or debit cards in the mail. If the 15th falls on a weekend or holiday, payments will be made on the closest business day. Most eligible families do not have to do anything to get these payments.
Question: How much will a family get each month?
Answer: The advance payments will account for half of a family's 2021 child tax credit. The amount a family receives each month will vary based on the number of children in the family, the ages of the kids and the amount of the family's adjusted gross income. For example, families who qualify for the full $3,000 ($3,600 for children under age 6) credit per child will get monthly payments of $250 per child ($300 per child under age 6) for six months. Families with higher incomes who qualify for the $2,000 credit will get monthly payments of $167 per child for six months.
Take a family of five with three children ages 12, 7 and 5. Assuming the family qualifies for the higher child credit and doesn't opt out of the advance payments, they would get $800 per month from the IRS from July through December, for a total of $4,800. They would then claim the additional $4,800 in child tax credits when they file their 2021 federal tax return next year.
If that same family with three children qualifies for the $2,000 per-child credit and doesn't opt out of the advance payments, they would get $500 per month from the IRS from July through December, for a total of $3,000. They would then claim the additional $3,000 in child tax credits when they file their 2021 Form 1040 next year.
Question: What if my family circumstances change during the year and I have more income or less income than shown on the 2019 or 2020 return that I filed with the IRS?
Answer: As mentioned above, the IRS will generally base eligibility for the credit and advance payments, and calculate the amount of the advance payment, based on previously filed tax returns. It will first look at your 2020 return. If you haven't filed a 2020 return, the IRS will look at your 2019 return. The IRS will assume that the number of children and the income that you reported on your 2020 (or 2019) return are the same for 2021. It will account for the passage of time only for determining the age of the children.
The American Rescue Plan requires the IRS to develop an online portal so that you can update your income, marital status and the number of qualifying children. So, if your circumstances changed in 2021, and you believe those changes could affect the amount of your child credit for 2021, go onto that portal once it is up and running and update it for the correct information. The IRS says it will to launch that portal by July 1 as required under the law.
The IRS also plans to send letters detailing the new child tax credit program to potentially eligible families, based on 2019 or 2020 returns. We don't know yet when the IRS will mail these letters, but we expect it will be before the agency launches the online portal.
Question: What if I had a baby this year? Will I get advance payments?
Answer: As discussed, the American Rescue Plan calls for the IRS to develop an online portal, so that you can update certain information, including the number of qualifying children. It is hoped that this web tool will be up and running by July. So, if you had a baby in 2021, you could update the portal so the IRS will know to begin sending you payments. If you decide not to do this, you're not out of luck. You won't get the payments, but you'll be able to account for your child when you file your 2021 return next year. Provided you are otherwise eligible to take the child credit, you can take a child tax credit of up to $3,600 for your baby on your 2021 Form 1040.
Question: I know I will qualify for a child tax credit for 2021, but I don't want to receive advance payments. Is there a way of opting out?
Answer: Yes. People who want to opt out of the advance payments and instead take the full child credit on their 2021 return can do so through the online tool that the IRS will develop.
Question: I do not file tax returns because my income is below the threshold required to file. Will I still qualify for the advance monthly payments?
Answer: Yes, but you'll have to jump through a few hoops if you didn't use the IRS's online tool for non-filers in 2020 to provide information to the tax agency for purposes of qualifying for stimulus payments. That tool was called the "Non-Filers: Enter Payment Info Here" portal.
The IRS will accept simple returns on Form 1040 or Form 1040-SR filed electronically or on paper. But you don't have to fill out the entire return. Instead, you will only need to include your filing status, your identifying information (name, address and Social Security number) and that of your spouse, provide information about your children and dependents, and follow the rest of the IRS's instructions. Alternatively, if you had no adjusted gross income for 2020, you may electronically file a regular Form 1040 or 1040-SR return.
For a complete rundown of the IRS instructions for simple returns and zero AGI returns, see Child Tax Credit 2021: How to Get Monthly Payments if You Don't File Tax Returns.
Question: Do I have to pay tax on the payments I get?
Answer: No. The payments that you receive are advance payments of the 2021 child tax credit, so they are not taxable. On your 2021 Form 1040 that you file next year, you will reconcile the monthly payments that you receive from the IRS in 2021 with the child tax credit that you are actually entitled to. The law requires the IRS to mail out a notice by January 31, 2022, showing the total amount of payments made to you during 2021.
Question: Do overpayments of the child credit need to be paid back?
Answer: It depends. With advance payments of the child tax credit, there will sure to be instances in which families receive more in advance child tax credit payments from the IRS than they are otherwise entitled to. And the American Rescue Plan contemplates this by providing a "safe harbor" for lower- and moderate-income taxpayers.
Families with 2021 adjusted gross income at or below $40,000 on a single return, $50,000 on a head-of-household return and $60,000 on a joint return won't have to repay any credit overpayments that they get. On the other hand, families with 2021 adjusted gross incomes of at least $80,000 on a single return, $100,000 on a head-of-household return and $120,000 on a joint return will need to repay the entire amount of any overpayment when they file their 2021 tax return next year. And families with 2021 adjusted gross incomes between these thresholds will need to repay a portion of the overpayment.