What You Need to Know about the Child Tax Credit

To help families get back on their feet after the ravaging effects of COVID-19, the federal government increased the child tax credit of up to $3,600 for eligible children as part of the March American Rescue Plan. Coverage of the much-needed rescue package focused on the increased stimulus payments, but the child tax credit had some significant changes as well. Namely, some families will begin to receive advanced payments starting July 15 (IRS). Here’s everything you need to know about the child tax credit in 2021!

HOW MUCH WILL YOU RECEIVE?

Families with a dependent child age 17 or younger will receive a $3,000 refundable tax credit per child. If your dependent children are under the age of 6 on December 31, 2021, you’ll receive a total of $3,600 for each of them.

Like the stimulus payments before them, the income threshold for the full payment is $75,000 for single filers; $150,000 for joint filers, widows, and widowers; and $112,500 for heads of household. If your modified adjusted gross income is higher than that, you’ll receive a diminishing payment based on how much you make over the threshold (Nerdwallet).

This type of tax credit—a refundable tax credit—guarantees that you’ll receive the full amount. Refundable tax credits are applied first to any owed tax and you get a refund if your total credit is greater than what you owe (TurboTax). It is treated the same way that tax payments are treated through your W-4 withholding—if you pay more than you owe, you’d receive some money as a refund. This type of credit is different from a nonrefundable credit, which cannot reduce your tax liability beyond $0—you won’t receive extra money from a nonrefundable credit beyond what is needed to cover your existing tax liability.

ARE YOU ELIGIBLE?

Thankfully you don’t have to guess if you’ll be eligible! The IRS has a tool on its website to check your eligibility. It takes just a few minutes and can provide you with a definitive answer. Given the wide array of possible scenarios, we will not attempt to describe every situation here.

HOW DO I ENROLL IN ADVANCE PAYMENTS?

If your dependent child (or children) will be under the age of 18 on December 31, 2021 and you filed a 2019 or 2020 tax return claiming your child tax credit, you’ll be automatically enrolled to receive advanced payments starting this July! You’ll also be automatically enrolled if you used the Economic Impact Payment tool on the IRS website to receive your stimulus check(s) (IRS). In both these scenarios, no additional input is required from you to begin receiving advanced payments. If you aren’t required to file a tax return and are wondering how to get your payment, you can enter your information here.

If you are automatically enrolled, you’ll receive half of your tax credit in installments every month starting on July 15 (IRS). The IRS will pay half of the total credit amount this way with the rest claimed on your 2021 income tax return when you file in 2022.

In some rare cases, you may have to return part of your child tax credit if you receive advanced payments. Possible reasons include income increases in 2021 that push you beyond the full payment threshold or a change of custody of dependents (CNBC). If you think any of these situations apply to you, it may be worth stopping advanced payments so you don’t have a surprising tax bill in 2022.

You can check to see if you’re automatically enrolled, stop your advance payments, or update your bank account information on the IRS website.