The American Rescue Plan introduced significant changes to the child tax credit (CTC). To keep you up-to-date and help you serve your clients, we’re answering your FAQs on the new child tax credit.
What is the child tax credit?
As you likely already know, the child tax credit is a (partially) refundable tax credit for families with children. Unlike tax deductions, which only offset taxes owed at the end of the year, refundable tax credits can be received as a refund even if the taxpayer paid less than the amount of the credit throughout the year.
The child tax credit itself isn’t new. While it has changed throughout the years, it’s recently undergone an extensive overhaul under the American Rescue Plan.
How has the child tax credit changed?
The latest stimulus bill has introduced several significant changes to the CTC:
- More money per child: Under the new law, families are now eligible for a maximum tax credit of $3,600 for each child under 6 and $3,000 for each child from ages 6-17. This is an increase from the previous amount of $2,000 per child up to age 16.
- Fully refundable: Previously, only $1,400 of the $2,000 tax credit was refundable, meaning that if a family didn’t owe any taxes at the end of the year, they could receive up to $1,400 of unused credit back in their refund. Now, the entire tax credit is refundable. Even if a family owes no taxes, they’ll qualify to receive the full tax credit as part of their refund.
- Advance monthly payment option: The new monthly payment option is one of the most significant changes to the child tax credit. Starting in July, families can choose to receive their child tax credit as a monthly payment instead of receiving it at the end of the year as a tax refund. We will update this article with more details about this process as they become available.
The IRS plans to keep this article, Advanced Child Tax Credit Payments, up to date with the most recent information.
Who qualifies for the additional child tax credit?
To qualify for the full amount of the new CTC, your clients’ adjusted gross income (AGI) must be $75,000 or less for single filers, $150,000 or less for joint filers, and $112,500 or less for head of household filers.
The previous thresholds are still in place for families who make more, allowing them to receive a lower child tax credit of $2,000. Just as they did under the previous CTC law, individuals with an AGI of $200,000 or couples with an AGI of $400,000 or less still qualify for $2,000 in CTC per child.
If your client had a change in life situation, such as a new job, new salary, or an added dependent since they filed their taxes, the IRS has created a portal for them to report these changes so they can claim the correct amount they qualify for.
If your client was not required to file taxes but still wants to claim the CTC, direct them to the IRS non-filer tool. Make sure they follow the instructions carefully. If they have already filed their 2020 or 2019 taxes, do not encourage them to use the tool.
When do monthly payments begin, and how do they work?
The IRS will send out payments beginning July 15th, 2021. To keep your clients up to date, encourage them to sign up for your emails and newsletters and follow you on social media. When the IRS has more information on this process, use those platforms to let clients know what they need.
Is this change permanent?
No. Currently, these changes only apply to the 2021 tax year.
Is the 2020 child tax credit affected?
No, the child tax credit for the 2020 year has not been changed. Some clients may expect to receive a larger refund this year, so be sure to explain that these changes will be reflected on their 2021 tax return.
The information in this article is up to date for tax year 2021 (taxes filed in 2022).