Under prior tax law, qualifying taxpayers with dependent children under age 17 could get a child tax credit of up to $2,000 per child. The taxpayer has to meet income limitations and the child must also meet certain requirements. Up to $1,400 of the credit was “refundable”, which means you could get a refund of that amount even if you had no tax liability.


The recently enacted American Rescue Plan, which also provides stimulus payments of up to $1,400 per qualifying individual, also made some significant changes to the child tax credit. The changes currently apply only to the 2021 tax year. But if you qualify the changes will affect you soon.


The credit is expanded in several ways. First, 17-year-olds now qualify. Second, the credit is increased from $2,000 per qualifying child to $3,000 per child (and it further increases to $3,600 per child under age 6). Third, the credit becomes fully refundable ($1,400 under prior law). Fourth, one half of the credit is going to be paid by the IRS to families in monthly payments beginning in July 2021.


The income limits on the enhanced credit are changed, but families with up to $400,000 of adjusted gross income will still qualify for a credit of $2,000 per child.


Advance payments of one half of the credit are planned to be sent out beginning in July and the IRS will determine eligibility based on previously filed tax returns. They will look at your 2020 tax return if it has been filed, if not, they will base the payments on your 2019 tax return.


Since the IRS will be basing the payments on previously filed returns, you could get more, or less, than you should receive. The law requires the IRS to develop an online portal that will allow you to update your income, marital status, and number of qualifying children.

Remember, these payments are advance payments of your 2021 child tax credit. The payments you receive will be reconciled on your 2021 tax return. There are going to be instances where taxpayers receive more of this credit than they’re entitled to in advance payments. There is a safe-harbor for lower and moderate-income taxpayers that will exempt them from paying back the overpayment.


Obviously, I’ve just hit the highlights of the changes to the child tax credit.  There are plenty of online calculators if you’d like to see how much your credit will go up, or contact our office for more information.


As always, I am looking for article ideas that you would like me to cover. If you have an idea for a future article, or just have a topic you would like more information on, please send me an email.


At Faw & Associates, we are always available to answer any of your tax or financial planning questions. You can get more information on this or many other topics at our website – or you can contact us directly by calling our office at (336) 838-3080. You can also email me at any time with your question or concern.