What You Should Know About the New Child Tax Credit
The COVID-19 pandemic has created extreme financial strain for many American families, and the recently passed American Rescue Plan includes several measures aimed at easing this burden for average American families. One of the most important changes you should understand for the purposes of filing your 2021 tax returns next year is the change to the 2021 child tax credit.
Previously, American taxpayers claimed the child tax credit when filing their tax returns. They receive tax deductions based on the number of children they have and their ages. The American Rescue Plan includes a measure to provide the child tax credit early, effectively issuing monthly payments for the rest of 2021. By December of 2021, American families who wish to claim this advance on their child tax credit should have received the full amounts of their claimable deductions. While this can provide a significant amount of extra liquidity to families each month, it does entail some risk for families when it comes time to file 2021 tax returns.
Who Is Eligible for the New Child Tax Credit?
Eligibility to claim the new child tax credit depends on your income. For married couples filing their taxes jointly for 2021, the new increases to the child tax credit will start to phase out past $150,000 in joint income. A single parent filing as head-of-household will see the new child tax credit begin to phase out past $112,500 in income. Essentially, married couples earning more than $150,000 and single parents filing as heads-of-household in 2021 earning more than $112,500 will still be able to claim the child tax credit at the previous rate, not the increased rate approved by the American Rescue Plan.
What Happens When I File My 2021 Tax Return?
While advance payments of the new child tax credit may offer financial relief to some families, others may want to opt-out of this system to avoid a tax balance due when they file their 2021 tax returns. Every dollar you receive of the new child tax credit will reduce the amount you can deduct when you file your 2021 tax return. This could result in a smaller tax refund than you expect for 2021, and some families may even have a balance due because of the advance receipt of the new child tax credit.
If you do not want to claim the new child tax credit payments, the IRS allows you to opt-out by August 2, 2021 via their online portal. It will be possible to opt-out from future payments on a monthly basis as long as you meet the deadline, the first of which being August 2, 2021. Once you opt-out, you will not receive any advance payments for the rest of the year, so it is only necessary to perform the opt-out process once this year.
Finding Help With Your 2021 Taxes
The advance on the new child tax credit may provide some much-needed financial flexibility for some families, but it may cause problems for others. The deadline to opt-out of the rest of the year’s payments is quickly approaching, so it’s vital to do your research and determine whether the advance payments for the new child tax credit are right for your family. Contact Western Shamrock today to consult with our team and get the answers you need for your most important tax questions for 2021.