Starting in mid-July, families across the US with children aged 17 and younger, began receiving monthly payments from an enhanced Child Tax Credit for 2021. If you received your first payment you may be wondering what it is and how this will impact your 2021 taxes. If you did not receive the credit, you may also be wondering if there is anything you can do to still qualify.
The Child Tax Credit payments are support measures that were passed in relation to the Covid-19 economic response. The amount you receive depends on the age of your children as well as specified income limits. Families need to look carefully at this credit as it may not be too late to qualify. Even if you did receive a payment, you should still look closely as you may have to pay the funds back if your income ends up being above the threshold for 2021.
How much can we get?
Children under age 6
For 2021 the enhanced Child Tax Credit is $3,600 for children under the age of 6. The regular tax credit is $2,000. This means that this year families with young children can receive an extra $1,600 dollars. Credits are dollar-for-dollar tax values as opposed to deductions which only partially reduce taxes. This translates into a valuable tax-strategy that can put money into your family’s bank account.
Children age 6-17
For children ages 6-17 the credit is $3,000. Again, the normal credit is $2,000. This represents an extra $1,000 for 2021.
What are the income limits?
Your income ultimately determines how much of each credit you will receive. For 2021, the expanded credit begins to phase out at $150,000 in Adjusted Gross Income (AGI) for married couples and $75,000 in income (AGI) for single filers.
Note: It is important to note that the income threshold is based on Adjusted Gross Income (AGI) and not other measures. Consult your tax or financial advisor if you are unsure what impacts this.
Monthly Payment Options
Part of the American Rescue Plan of 2021 that established this benefit also allows for one-half of the credit to be paid out over 6 months starting in July 2021. For a child under age 6 this means you can receive $300/month as an advance on your tax credit. These are valuable funds that could be used to pay down debts, increase your emergency fund, or save and invest in something like your child’s 529 plan.
If you did not receive your first payment and believe you should have you can go to the IRS website to register - IRS Child Tax Credit Portal.
If you had a child during 2021 the IRS does not know about this and you are likely not receiving a credit for that child either. This can also be updated using the IRS web page here.
You can also unenroll if you feel your income will disqualify you. If not, you will essentially have to pay these funds back at tax-filing time.
There is still time!
The good news is that there is still time to plan around your income and 2021 taxes in an attempt to qualify for this valuable credit. If you are close to the income threshold amounts, here are some strategies to consider:
For those making Roth 401(k) contributions switch to a traditional deductible contribution
Super fund your 401(k) for the rest of the year if you are below annual contribution limits. Note: you should have an adequate emergency fund before using this strategy.
Consider deferring income items until next year to the extent possible.
While potentially too late for 2021, going forward consider funding tax-advantaged Dependent Care FSA’s and/or Health FSA accounts.
The enhanced Child Tax Credit can be very helpful to young families, or a filing nightmare if your income is too high. It’s important to do your homework now before it’s too late. Do you have questions about the credit or any other area of your personal finances? Seek professional guidance from a trusted and experienced tax or financial planner.
GuidePoint Financial Planning - Reston Va Financial Planning
Ryan Phillips, CFP® is the founder of GuidePoint Financial Planning. He is passionate about helping busy families plan, save, and invest for their financial future. Contact him today if you are interested in learning more about the benefits of working with a fee-only (no-commission) financial planner.