2021 Child Tax Credit Includes July 15 Advances

  •   |   Meghan Freed

There have been some significant changes to the 2021 Child Tax Credit under the American Rescue Plan.  The good news is that the credit increased for many.  However, there are potential complications for people whose income changed or who are divorced or divorcing.  Read on to learn more.  For example, what the key changes are, who is eligible, how advances work, and what to watch out for.

Key Changes to the Child Tax Credit for 2021

Here are the 5 key changes to the Child Tax Credit (for 2021 only):

  1. For children over 6, the credit is increased from $2,000 to $3,000 per child
  2. For children under 6, the credit is increased from $2,000 to $3,600 per child
  3. The age limit for eligible children went from 16 to 17
  4. IRS will now pay half the total credit in advance monthly payments beginning July 15.  You claim the other half when you file your 2021 income tax return.

Who is Eligible for the 2021 Child Tax Credit?

The credit begins to phase out if your modified adjusted gross income (AGI) is above $400,000 on a joint return.  The phase-out begins over $200,000 on a single or head-of-household return.

Once you reach the $400,000 or $200,000 threshold, the credit amount is reduced by roughly $50 for each $1,000 of AGI over the applicable threshold amount.

2021 Child Tax Credit Advances

One of the most important things to keep in mind about the 2021 Child Tax Credit advances is that they are a partial prepayment of the credit you would normally get when you file your 2021 tax return.  But, the IRS is calculating advance payments based upon your 2019 or 2020 tax information.  If your old tax returns do not reflect your situation for purposes of your 2021 taxes, things may get complicated.  For example, if you had a significant increase or decrease in salary or a life event like a divorce, it’s possible you could wind up having to repay the advance.

Things to Watch Out For with Advances

The most important thing to be mindful of is that advance payments may have to be repaid if your situation changes on your 2021 taxes.  Some people will receive prepayments automatically.

Generally speaking, you have two options:

  1. Opt-out of the advance via the IRS Child Tax Credit Update Portal. (You can also use the portal to check if you’re enrolled to receive advance payments and to provide updated bank information.)
  2. Take the advance and prepare to repay the money if you’re not eligible at tax time.

2021 Child Tax Advance Credit and Divorce

If you’re divorced or in the process of divorce, you’ll want to be mindful of some additional things.  For example, you and your ex-spouse may claim your children as dependents in alternating years.  Rather than wind up with a post-judgment litigation over the issue with your spouse, it’s best to discuss how to address the advance now.  If you and your spouse are unable to reach an agreement, mediation or collaborative law may be able to help you resolve it outside of court. Your divorce attorney and/or tax professional will be able to give you individualized guidance.

Read: Tax Basics for Divorce

Next Steps

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Schedule your Goals & Planning Conference today, or contact us either here or by phone.

Freed Marcroft LLC

Freed Marcroft LLC