The child tax credit 2021
What Changes Can Families Expect This Year?
In March 2021, a year after the onset of COVID-19 in America, the $1.9 trillion American Rescue Plan was passed. In addition to stimulus payments, vaccination initiatives, and financial relief for small businesses, this plan made some major temporary changes to the child tax credit.
If you’re a parent or guardian, you could be eligible to receive a one-time enhanced tax credit for your child. Here’s what families need to know.
- Watch your bank account for payments received
- Payments may be $1,000 per child or up to $1,600 for younger children
- Income will affect this child credit
What Is the Child Tax Credit?
The child tax credit is an available tax credit to families with children up to age 16. For the 2020 tax year, it is worth $2,000 per child. [1]
In order to be eligible, your child must:
- Be claimed on your tax return
- Be under the age of 17
- Be related to you
- Live with you for at least six months during the year
- Have a Social Security number
- Be a citizen or U.S. resident alien
Lower-income families who have earned at least $2,500 in income during the 2020 tax year may receive up to $1,400 in refundable credit.1
High-earning families will see a phase-out of the tax credit. For individuals or head-of-household returns with an adjusted gross income (AGI) over $200,000 (or $400,000 for married filing jointly), the child tax credit is reduced. Families will see a $50 reduction for every $1,000 over the AGI threshold amount based on filing status.1
Changes to the Child Tax Credit
Families will see a one-time increase in the tax credits for the 2021 tax year. For this year only, eligible families may receive up to $3,600 for children five years old and under, and up to $3,000 for children ages six to 17.2
While this is the basis of the adjustments made to the Child Tax Credit for 2021, there are several stipulations and eligibility requirements that families need to know.
Eligibility Requirements
The American Rescue Plan has changed several eligibility requirements for families, opening up the child tax credit to more parents who may previously not have qualified.
For this year only, parents with children aged 17 will be eligible for the child tax credit. Previously, children over the age of 16 did not qualify.
Additionally, the $2,500 earnings floor has been temporarily lifted, and the credit has become fully refundable. This means that families who report less than $2,500 in adjusted gross income may still qualify for the tax credit and could be refunded up to the full amount.
Other eligibility requirements are still in place. Just as in previous years, children must:
- Be claimed on your tax return
- Be related to you
- Live with you for at least six months during the year
- Have a Social Security number
- Be a citizen or U.S. resident alien
Reduced Amounts for High-Income Families
For 2021, not all families will be eligible to receive this additional $1,000 or $1,600 in enhanced child tax credits. Single filers with an AGI of $75,000 or joint filers with an AGI of $150,000 will start to see a reduction in enhanced benefits. [2]
It’s important to note that these reductions only refer to the additional amount, not the base $2,000. The enhanced credit will be reduced by $50 for every $1,000 over the AGI threshold based on filing status. [2]
For the base $2,000, the same phase-out system applies as it does for 2020. Single filers with an AGI above $200,000 and joint filers with an AGI above $400,000 will see a reduction in child tax credits - $50 for every $1,000 over the AGI threshold. [2]
Advanced Payments for 2021 Child Tax Credit
The IRS is required to send out payments to qualifying families in advance. These payments will be half of the amount families are eligible to receive, and they are expected to be sent to families in six installments between July and December 2021. Much like the stimulus checks, families can expect to see these payments appear via direct deposit into their accounts or in the form of a check received through the mail.
The IRS will determine eligibility based on your 2020 tax return, or your 2019 tax return if no 2020 return is on file. If your circumstances have changed and you either become eligible or ineligible for the credit, the IRS will be developing a portal that will allow you to update your information. This will be important for families who may have lost income or had a baby in 2021.
These changes to the child tax credit are temporary, but they can offer eligible families some important financial relief. If you think you may qualify, or you have questions about receiving your payments, your financial professional can help.
- https://www.congress.gov/bill/117th-congress/house-bill/1319
- https://www.irs.gov/newsroom/child-tax-credit-by-the-numbers
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
- Mullin's take on the "4% Retirement Rule"
- Navigate "Bad Portfolio Weather"
- Tips to Optimize Social Security
Articles and Assets
What are your Priorities?
Well it’s the end of the year. I just searched on Google for “market outlook 2018.” I came up with a little over 58-million “results.”
So should you be investing in stocks in 2018? The quick answer: It’s likely a prudent part of your portfolio. But it depends on your circumstances, right?
It’s apparently popular to throw your hat in the ring.
A mantra that you hear among disciplined professionals is to “stay the course.”
Then you hear “sell high, buy low.”
Who’s right?
The relief of a disciplined strategy is that it can be tailored to you. And tailor we think you should.
Yes, it’s possible that an investor may not utilize stocks in their portfolio at all. Or you may decide to go “all in” with a diversified stock portfolio.
(Side effects from tailoring a strategy may include increased confidence & persistence, apathy toward daily market reports, and increased focus on what really matters.)
Let’s begin with the “Why” of investing for you. Then you can request 15-minutes on the phone discuss your “how.”
So “Why Should You Invest”
Life changes and our “why” of investing ought to transform with life. Some invest for sport – they like the risk/reward of investing – they’re in it for the thrill. I don’t hang with this crowd.
Most of us ought to invest for things we want. Our money & our goals are serious. By investing in a diversified portfolio we can pursue things we want.
1. Living A Comfortable Retirement: Retirement is a noun. It’s up to you to really design and live a retirement that reflects you.
2. Purchasing a Home: Home is a place to live. It can take a down payment.
3. Passing an Inheritance on to Family:
4. Student Loan Shield: This idea is important for many Millennial graduates. Student loans can dominate your budget. But instead of accelerating those payments, what if you paid your required payments, and then invested the additional money that you were going to pay against your loan balance?
5. Emergency Reserves: You probably have read that it’s prudent to keep a relative healthy amount of cash in your checking/savings. Once you’ve achieved that, then you can consider investing additional funds. Go a step further and consider a non-retirement account for you and your house. You can spend this on cars, vacations or use it just as described in #4.
The Dow Jones has seen positive results, so far, in 2017. It’s unusual and sort of uncomfortable as the independent financial advisor. Why is it uncomfortable?
What would sting & linger longer? Finding $20 in the parking lot? Or finding a $20 parking fine on your windshield?
We’ve been finding a lot of metaphorical “$20’s” (i.e. “positive results”) in our portfolios this year. So the second we find a parking fine (or a few in a row) we’ll be sure to ask if stocks are still the right place to park our money.
Complacency can work against us, Dear Clients. Just keep recalling your long-haul strategy and your “why” of investing.
***
Peter Mullin is an independent financial advisor registered through LPL Financial. He lives in Rogers, MN with his family. He was born and raised in St. Cloud, MN. Mullin Wealth Management is located in Waite Park, MN.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing involves risk including loss of principal.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
All performance referenced is historical and is no guarantee of future results.
All indices are unmanaged and may not be invested into directly. No strategy assures success or protects against loss.