The 2021 advanced payments of the Child Tax Credit are due to start hitting bank accounts this month and carry on through the end of the year.
In March 2021, a year after the onset of COVID-19 in America, the $1.9 trillion American Rescue Plan was passed. In addition to stimulus payments, vaccination initiatives and financial relief for small businesses, this plan made some major temporary changes to the child tax credit.
If you’re a parent or guardian, you could be eligible to receive a one-time enhanced tax credit for your child. Here’s what families need to know.
While tax planning is a key element of financial planning, it’s important to remember that we are not tax preparers or CPAs here. So be sure to check with your tax professionals before officially doing anything.
What Is the Child Tax Credit?
The Child Tax Credit, and all other tax credits, are applied to the amount of tax you owe at year end. In 2020, the Child Tax Credit was worth $2,000 per child that met eligibility requirements.
So, if you have 2 children and they both meet the requirements, you will have a $4,000 tax credit to apply to your overall tax owed. It is a dollar for dollar decrease.
Changes to the Child Tax Credit
Families will see a one-time increase in the tax credits for the 2021 tax year. For this year only, eligible families may receive up to $3,600 for children five and under and up to $3,000 for children ages six to 17.
As mentioned above, this year, in 2021, advanced payments of the Child Tax Credit will also be sent out to those that meet the eligibility requirements. This will be based off your 2020 tax returns. And if you have not yet filed your 2020 taxes, it will be based off your 2019 tax returns.
If you choose to receive the advanced monthly payments, you will receive $250 for children 6 and above. For children aged 5 and under, you will receive $300 per month. This amounts to half of the tax credit. With the other half of the credit, if there is any, received when you file your 2021 taxes.
If you have direct deposit set up to your bank account from the IRS and have received stimulus payments, then these advanced payments will be directly deposited into that same bank account.
The IRS will send a letter to you before the direct payments are to be sent out.
The first payments are set to go out this month, July 2021, and continue for the rest of the year through December.
It is very important to keep track of the payments you receive and provide your tax preparer with all of that information at the end of the year.
The American Rescue Plan has changed several eligibility requirements for families, opening up the child tax credit to more parents who may previously not have qualified.
For this year only, parents with children aged 17 will be eligible for the child tax credit. Previously, children over the age of 16 did not qualify.
Other eligibility requirements are still in place. Just as in previous years, children must:
- Be claimed on your tax return
- Be related to you
- Live with you for at least six months during the year
- Have a Social Security number
- Be a citizen or U.S. resident alien
These changes to the child tax credit are temporary, but they can offer eligible families some important financial relief. An addition of potentially several hundred dollars per month can do a lot for a budget. And families with young children stand to benefit.
If this frees up cash flow, think about building up that emergency fund or investing the extra money for a later date. But, of course, if you need the money to cover household expenses, this is exactly why you are receiving the money. So take care of that first.
Again, I’d like to reiterate how crucial it is to please talk this over with your tax professional before making any official decisions. This should not be considered tax advice!
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