For 2021, the child tax credit is beefed up and changed in all kinds of ways…but also unchanged.
Confusing, right?
Here’s how the 2021 Child Tax Credits work
What really happened is that the existing 2020 tax credits remain as-is for 2021, and a separate “enhanced” credit was created on top of it.
Normally, taxpayers get a child tax credit of $2,000 per child under the age of 17 (as of the end of the tax year).
The credit starts phasing out for Single (and Head of Household) filers with adjusted gross income (AGI) above $200,000 and $400,000 for Joint filers.
What really happened is that the existing 2020 tax credits remain as is for 2021, and a separate “enhanced” credit was created on top of it.
The one change that applies to everyone is that 17 year-olds are now eligible for the child tax credit.
The enhanced child tax credit is worth up to:
- $1,600 per child under the age of 6, and
- $1,000 per child between 6-17 years old
- These amounts are in addition to the typical $2,000 per child credit
BUT, there are much lower AGI limits for the additional enhanced tax credits.
ENHANCED CREDIT PHASE-OUT THRESHOLDS | |
SINGLE (S) | $ 75,000 |
HEAD OF HOUSEHOLD (HOH) | $ 112,500 |
MARRIED FILING JOINT (MFJ) | $ 150,000 |
If your AGI passes these thresholds, your enhanced tax credit is reduced by $50 for each $1,000 of income above the threshold.
Example 1: You file MJF, have an AGI of $150,000, one 5-year-old, and one 8-year-old.
Your total child tax credit for 2021 will be $6,600
- $3,600 for the 5-year-old
- $3,000 for the 8-year-old
Example 2: You file MJF, have an AGI of $250,000, one 5-year-old, and one 8-year-old.
You don’t qualify for any of the enhanced child tax credit, but still qualify for the same old $2,000/child credit and get a total credit of $4,000.
- $2,000 for the 5-year-old
- $2,000 for the 8-year-old
There are too many variants to keep going on with more examples, so I suggest you use this 2021 Child Tax Credit Calculator for your personal situation.
*Here’s the one big thing everyone should understand about 2021 Child Tax Credits*
- The IRS is planning to Prepay 50% of the estimated child tax credit to taxpayers on a monthly basis starting in July 2021 through December.
- Based on your 2020 tax return information (or 2019 if 2020 not filed yet), they will calculate your estimated child tax credit for 2021 and send you monthly payments!
- There will be an IRS Portal created by July 1, supposedly, where you can update information if you have a new child, for example.
- You will also be able to OPT-OUT of having the prepayments sent to you, and just take the full correct amount of the tax credits on your 2021 tax return.
I highly recommend that most taxpayers opt-out of prepayments.
- Why? Unless you are really struggling to pay monthly bills right now and need those payments, it’s just going to create a mess when you go to file your 2021 tax return and make tax planning more difficult.
- For example, you may have your W-2 tax withholding set up perfectly so that you get a refund of ~$2,000 every year….and you count on this ‘windfall’ money to go on a small vacation. Well, you won’t be getting that $2,000 refund on your tax return, because the IRS already paid you advanced tax credits that are no longer available to reduce tax on your tax return. You may end up having to pay $2,000 tax on your 2021 return, which you didn’t account for because you spent the small monthly increments sent to you.
The IRS Portal is not open yet. This is an unprecedented program for the IRS to undertake. But when it does (by July 1), my suggestion is to log in and opt-out of the prepayments.
Should you have any questions about this or any other tax planning, please reach out to one of our tax specialists.
Chris Naquin
Wayfinder CPA
Wayfinder CPA