Still confused about how the child tax credit is working this year? Welcome to the club! Taxes are known to be confusing, but this credit has some extra twists and turns.
Let’s take a look at last year compared to this year to get a little context:
Last year, the child tax credit was $2,000 per child age 16 or younger and didn’t start phasing out until the parent’s income was over $400,000 for those filing jointly and $200,000 for single or head of household filers.
For 2021, they increased the available credit, but decided to add some age, income, and timing variants to the mix. This year, you can qualify for up to $3,600 per child age 5 and younger and up to $3,000 for kids ages 6-17. Note – they added the seventeen-year-olds back in and added to the $2k folks were already getting per child. Don’t think of the $3,600 or $3,000 per kid as a new credit – it’s just adding onto the $2k that was available last year. So, the IRS essentially added an extra $1,600 to the credit for the 5 and under kids and an extra $1,000 for the 6–17-year-olds.
To qualify for the extra child tax payments above the $2k per kid, (that $1,600 or $1,000), the income limits are different. This piece of the credit starts to phaseout at modified adjusted gross income of $150,000 for married filing jointly, $112,500 for head of household, and $75,00 for single filers. What’s Modified Adjusted Gross Income you ask? It’s basically your Adjusted Gross Income plus a few random items because the IRS seems to enjoy overcomplicating things. If you look at line 11 on your 2020 tax return, you will find your AGI (Adjusted Gross Income) and that will get you a ballpark figure to estimate this credit from. However, the credit available to you will ultimately be determined by your income for 2021, not 2020, so be sure to take note if this year is a lot different than last year for you income-wise.
Why am I Getting Payments Now?
To help get money in the hands of taxpayers sooner, the IRS started paying out an advance of half of this available credit in July of this year. So, they estimated your income based on your 2020 or 2019 return (whichever you had most recently filed) and divided it into monthly payments happening on the 15th of each month through the end of the year.
Example #1
– A married couple filing jointly making $110,000 per year with a 2-, 4-, and 7-year-old is estimated to get a total credit of $10,200 for 2021. ($3,600 for the 2-year-old, $3,600 for the 4-year-old, and $3,000 for the 7-year-old. They are under the phaseout limits, so they get the full extra credit amount. These folks likely started getting $850 per month from the IRS starting in July, so will receive a total of $5,100 (half of their credit) in advance.
Example #2
– A married couple filing jointly making $310,000 per year with the same 2-, 4-, and 7-year-old dependents. They are estimated to get a total credit for 2021 of $6,000 (essentially just the original $2,000 per kid because they are well above the income limits for the extra credits). So, they are likely getting a monthly payment of $500 now and will get a total of $3,000 paid to them before year end.
These advanced payments are a good thing for some, and a not-so-good thing for others. If this credit would have caused you a large refund at tax filing time and getting the credits now just reduces that refund and gets the money to you sooner – great! There are a couple of cases where this is not a great scenario. One would be if getting these advanced payments increases your tax bill next April to more than you are ready to pay in a lump sum. This might happen to the couple in Example #2 above. Since they are only getting the regular credit amount, get $3,000 in advance may cause them to owe an extra $3,000 when they file their 2021 return. Another would be if your recent tax return looks nothing like your 2021 income causing the IRS to pay you advanced credits that you don’t actually qualify for and will ultimately have to pay back.
If you think you might fall into one of these scenarios, it might be best to stash these funds in a savings account to be ready for tax time. You can also go to the IRS website and “opt out” of the remaining payments, but you must do that NO LATER THAN OCTOBER 4TH.
Jamie A. Bosse is a CERTIFIED FINANCIAL PLANNER professional and a board member of the Financial Planning Association of Greater Kansas City. She also is Lead Financial Planner at Aspyre Wealth Partners.
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