Podcast: How the Child Tax Credit Will Affect Your 2021 Return

Back in March we talked about changes to the Child Tax Credit for 2021. Those checks and deposits started to arrive in July. On today’s show, I just want to make sure parents/guardians know how the Child Tax Credit payments will affect their 2021 return as it may produce some surprises.

Why don’t we start with a quick refresher?

• • Beginning in 2021, the credit increased to $3,000 for children age 6 to 17 and $3,600 for children under age 6.
  • Along with this increase, the credit is now being paid out in monthly installments.
  • In order to qualify for the increased credit, a single individual has to have income of less than $75,000. For married couples, the income limit doubles to $150,000. Over these amounts, the credit starts to phase out.

But you can still qualify if your income is over, correct?

• • Yes, for those who phase out of the higher credit based on the $75k or $150k limits, can still qualify for the $2,000 child tax credit that was available in 2020.
  • To qualify for the $2,000 credit, your income has to be below $200k single and $400k married.

You also mentioned something about monthly installments?

• • For those eligible for the higher $3,000 or $3,600 credit, the IRS plans to send out monthly payments of $250-$300 per month that began in July.
  • This will be an advanced payment on the credit.
  • So about half the credit will come in monthly installments and the rest will come when the tax return is filed.

So this is an advanced credit?

• • Yes, the eligibility for the monthly payments will be based on the 2020 return, but the actual credit will be based on the 2021 return once it is filed. This reconciliation process may cause some problems.

What if someone ends up not getting enough advanced credit?

• • That one is easy since they will get the rest of the credit when they file their return.

I am guessing that if someone receives too much, that may be a problem?

• • Yes, because if someone qualified based on their 2020 income, but does not qualify based on their 2021 return, they may need to pay that back.
  • Or because of the advanced payment, their tax refund may be a lot less than a normal year. So if they use that refund to pay bills, there may be less.

What 2021 family changes may trigger a payback?

• • May have claimed someone in 2020, but not in 2021.
  • Their income may increase.
  • Their filing status may change – either getting married or divorce.

Can someone elect not to receive the advanced payment?

• • Yes there is an opt-out process on the IRS website.

Be sure to talk to a tax professional if you have any questions about how the Child Tax Credit will affect your return or would like further assistance. 

Jeff Dvorachek

As a partner, I have thorough experience providing tax services to individuals, privately held businesses, nonprofit entities and estates and trusts. I also provide compilation and review services.