The federal government has upgraded its Child Tax Credit.
First, the Internal Revenue Service is paying many families who qualify for the CTC 50% of their credit before 2021 ends. Second, the credit has grown larger for most eligible families: $3,000 per child, $3,600 per child under age 6. Third, this year’s CTC is fully refundable. Fourth, the credit has been extended to 17-year-olds for the first time – that is, children who turn 17 in 2021.1,2
Remember, this article is for informational purposes only. It’s not a replacement for real-life advice, so make sure to consult your tax or legal professionals if you have any questions about the CTC or how it operates.
All this comes with a caveat. Some families may end up getting a bigger CTC than they should, and they may have to pay some of it back. Certain households may see their adjusted gross incomes (AGIs) rise for 2021, to the point where they may be eligible for less of the CTC than the I.R.S. has paid out to them.2
CTC payments are going out in monthly increments through December. Eligible families are receiving $250 a month for each child aged 6-17 and $300 a month for each child under age 6. A small number of CTC recipients are opting for a lump-sum payment that the I.R.S. will send them in 2022, after they file their 2021 federal tax returns.2
High-income families might get less. Phase-outs apply for this year’s expanded per-child credits of $3,000/$3,600. As a result, affluent households might only receive the standard $2,000-per-child credit in six monthly increments rather than the enlarged one.2
Phase-outs will kick in for single filers with modified adjusted gross income (MAGI) greater than $75,000, heads of household with MAGI greater than $112,500 and joint filers and widows/widowers with MAGI greater than $150,000. For each $1,000 (or fraction thereof) that the taxpayer’s MAGI exceeds the applicable threshold, the taxpayer’s CTC is reduced by $50.3
Some divorced parents have opted for the lump-sum payment in 2022. Here, the risk of taking the monthly payments is that if one parent claimed a child in 2020 but doesn’t in 2021, they may get CTC credits in 2021 that they have to pay back in 2022.2
Investment advisory services are offered through Trek Financial, LLC., an SEC Registered Investment Adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
Kiplinger.com, July 14, 2021
CNBC, June 30, 2021
Internal Revenue Service, July 30, 2021