On July 15th, 2021, the IRS will send the first Child Tax Credit payments to eligible parents with a qualifying child. These payments are up to $3,600 per child and are part of the American Rescue Plan Act of 2021 (ARPA).
These advanced payments are made against your 2021 tax return and can be worth as much as $300 per month for each qualifying child. But do you qualify for the Child Tax Credit? We’re here to tell you what it is, how much to expect, and how you can claim it
What Is the 2021 Child Tax Credit?
The Child Tax Credit is a long-standing tax relief for parents of a qualifying child. It was increased from $2000 to as much as $3,600 as part of the COVID-19 relief package. How much you receive depends on your income and the age of your child.
Another significant change is that it’s also being offered to parents in advance. This means you can choose to receive half of the credit as a monthly payment this year if you wish. You may also choose to take it when you prepare your 2021 tax statement next year. It’s critical to note that this is a tax credit, not a deduction.
How Much Is It?
Your income and the age of the child impact how much you’ll get. The credit amount starts being reduced gradually as your joint income exceeds $150,000, or your single income exceeds $75,000. Head of households start to see a phase-out of the credit at $112,500. CNET published a calculator to estimate your payment. Also, the IRS is expected to have a calculator available soon to help you determine how much your payments will be.
One significant change to the standard Child Tax Credit is the increase in the amount for younger children. Parents of children between 6 – 17 will receive $3,000, while under six will get $3,600.
How Do You Qualify?
For 2020, your modified adjusted gross income must be below $400,000 for married filing jointly or $200,000 for individuals. For 2021, it’s $150,000 for couples and $75,000 for single filers. Of course, there’s no way to know your 2021 income yet, but if it turns out to impact the credit amount, you’ll be expected to refund the amount, generally with no penalty.
Due to the coronavirus, one particular provision of the credit is that for the 2020 income requirements, you may use either your 2020 or 2019 income – whichever is more advantageous to you. In any case, your child must be at or under their age limit on December 31st, 2021, for you to receive the age-dependent benefit from this credit. In other words, they must be under 17 to receive any benefit (and under 6 for the higher credit) for the entire calendar year of 2021.
To be eligible, you generally must have provided a minimum of 50% of the child’s support during the last year. Plus, they’re generally expected to have lived with you for at least half the year. There may be exceptions, so if you’re not sure, you can consult the IRS publication for non-custodial parents, call the IRS at +1-800-829-1040, or ask your professional tax preparer.
What Are Advanced Payments?
This tax credit is part of the ARPA program to help the millions of Americans who were harmed by the coronavirus disaster and stimulate the economy. Therefore, instead of only applying the credit to your 2021 tax return next year, you can take payments starting on July 15th and running through December 15th. With six months of payments, that’ll get you 50% of your total credit this year. You can then apply the other 50% as a dollar-for-dollar tax credit on your tax return in 2021.
What’s the Difference Between a Credit and a Deduction?
There are two significant differences. First, a tax deduction is used to lower your taxable income. Since your income tax is a percentage of your taxable income, that means the deduction is figured in before the tax, so it only reduces your tax bill by whatever your highest tax rate (your marginal rate) is. This makes it a dollar-for-dollar refund directly to you.
Second, as a refundable credit, you can receive it directly as a tax refund – even if you owe nothing. Deductions can only reduce your tax liability and are not refundable. While not every tax credit is refundable, the 2021 Child Tax Credit is.
How Can You Claim It?
The IRS plans to keep its Advance Child Tax Credit Payment webpage updated as new information becomes available. It’ll include information on how to file for the credit, including a website. You’ll need the appropriate personal information to log in, which may include your social security number and previous tax year information.
Are There Other Child Tax Credits Available?
Two of them. First, if your joint income in 2020 was below $47,646 with one child, you may qualify for the Earned Income Tax Credit. The income level goes up with more children – up to $56,844 when filing jointly with three or more children. If you’re filing as a single earner or head of household, the income amount is $41,756 for one child and graduating to $50,954 for three or more kids.
There’s also a Child and Dependent Care Tax Credit program designed to help alleviate the considerable cost of childcare for working parents. You may be eligible for a credit of up to 35% of the cost of your childcare on as much as $6,000 in care costs. This program is meant for both child and dependent care of qualifying individuals while either you or your spouse is working or looking for work.
These programs are meant to empower American citizens by improving equity and returning some of their hard-earned money to them. Flyp is also dedicated to empowering you by stripping away the old, predatory banking methods and remaining transparent. We’re dedicated to helping you achieve financial independence by eliminating unnecessary fees and getting you the information you need to make wise financial choices.
What Are the Best Ways to Use the Credit?
Ideally, the best use of the credit is to pay down any debt that is accruing interest, especially high-interest debt such as credit cards. However, the COVID-19 crisis has put many parents in a precarious position with some necessities going unfulfilled. If you must choose between groceries and medicine or are falling behind in utility payments, this credit could be a lifesaver.
Also, if you don’t have an emergency fund, the payments are perfect for starting one. Life will eventually throw you a nasty surprise, so having a minimum of $1,000 in the bank is strongly recommended to cover unexpected expenses. The ultimate goal for an emergency fund is to have 3 to 6 months’ income in a savings account, but that can be impractical for many parents, so aiming for $1,000 is a satisfactory alternative.
These programs are meant to empower American citizens by improving equity and returning some of their hard-earned money to them. Flyp is also dedicated to empowering you by stripping away the old, predatory ways of banking and remaining transparent. We’re dedicated to helping you achieve financial independence by eliminating all unnecessary fees and getting you the information you need to make wise financial choices.
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