It is important to note that the 2021 rules for the credit have only enhanced the 2020 rules, not replaced them. Let’s start by reviewing 2020 rules as a baseline and dive into what’s new for this year.
For each child under the age of 17, you received a $2,000 tax credit, or a dollar-for-dollar reduction on income tax owed. Eligibility was subject to an income threshold, modified adjusted gross income (MAGI) to be below $400,000 for joint, and $200,000 for individuals. In the simplest terms, MAGI is your Adjusted Gross Income (total household income less adjustments) with any tax-exempt interest and certain deductions added back. Once MAGI was above $400,000/$200,000, the credit amount was phased out by $50 for each $1,000 of income over the threshold.
This credit was refundable up to $1,400. Meaning that if the amount of the credit exceeded taxes owed, you receive the excess amount as a refund up to $1,400, not the full $2,000.
Below are the enhancements made to the child tax credit this year:
- Children under the age of 18 now qualify for the credit, increasing the age requirement by 1 year
- The credit amount is increased from $2,000 to $3,000 (and up to $3,600 for children under the age of 6)
- MAGI now to be below $150,000 for joint, and $75,000 for individuals, still phasing out at $50 for each $1,000 of income over the threshold
- Tax credit is fully refundable, dropping the $1,400 max refund from last year. Even if you have no tax liability, families can receive the full credit as a payout
The IRS will pay out half of the eligible credit via monthly installments ending in December 2021. The other half of the credit is claimed when filing for 2021 taxes. Eligibility for monthly payments is based on your income from the 2020 return, or 2019 if 2020 has not been filed. The payments for eligible families started in July.
If you do not qualify for the increased credit for 2021 but MAGI is below $400,000, you still can claim the regular $2,000 credit less any advanced payments paid out.
The changes made to the child tax credit this year are not permanent. The current rules are only temporary for 2021. The child tax credit will revert to the 2020 rules in 2022. However, there is potential for additional legislation in the coming months to extend this year’s rules until 2025 creating an increased credit and a fully refundable credit.
WHAT SHOULD I DO?
If you qualify for monthly payments but estimate 2021 income will exceed the threshold, you can opt-out of the advance payments. Use the IRS portal link here. The portal can also be useful to check on the status of payments. If your income exceeds the threshold and you have been receiving monthly payments, you will owe the money back when filing for taxes.
If you estimate 2021 income to not exceed the threshold, the IRS portal also allows you to opt-out of remaining advance payments. You can then receive the remainder of your eligible credit when filing for taxes. This could be helpful if you want to apply the credit directly to taxes.