Advance Child Tax Credit: How it Will Impact Your Tax Refund

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Part of the American Rescue Plan Act is an advanced payment of the Child Tax Credit. Here’s how it will impact your 2021 taxes.

What’s changing?

For 2021 only, the Child Tax Credit for children under 17 changes in the following ways:

  • The $2,000 credit increases to $3,000 for children between 6 and 17
  • The $2,000 credit increases to $3,600 for children under 6 at the end of 2021
  • Taxpayers will receive a monthly advance equal to half of their estimated credit during the final six months of 2021. That’s July through December.
  • The credit includes children who turn 17 during 2021.

How will I get the advance?

You should expect to get the advance the same way as your tax refund or stimulus check. If you don’t get the advance, for example if the IRS thinks you don’t qualify, you can claim the credit when you file your 2021 tax return.

Who qualifies for the expanded tax credit?

To qualify for the additional amounts and advanced payments, you will need an AGI under $150,000 for joint filers, $112,500 for heads of household, and $75,000 for single filers. Those with incomes slightly above the cutoff may see a reduced payment.

How will the IRS decide who qualifies?

The IRS will use information from your 2020 tax return to determine your eligibility. If they haven’t received and processed your 2020 return, they will use 2019.

If you didn’t previously qualify, for example you had a baby in 2021, you can claim the full credit when you file your tax return.

Will the Child Tax Credit advance affect my refund?

It is possible for the Child Tax Credit advance to reduce your tax refund. Unlike the stimulus payments, this is not an entirely new tax credit. $2,000 is an existing credit, and $1,000 of that will be advanced.

Let’s say your 2020 and 2021 tax returns will otherwise be identical. In 2020, you got a $2,000 Child Tax Credit which turned into a $2,000 refund. In 2021, we’ll assume your child’s age gets you $3,000.

  • You will get half of that $3,000, or $1,500, as six monthly payments of $250 during the second half of 2020.
  • You will get the other half, or $1,500, when you file your tax return.
  • When you file your tax return, the amount of Child Tax Credit you’re claiming for refund is now $1,500 instead of $2,000. Even though the total credit is bigger this year, you already got part of it.
  • That means your refund will be $500 smaller than the $2,000 you got in 2020.

Even though you get more total money, you need to remember your 2021 refund may be smaller or you could end up owing money based on the other taxes you owe. It’s similar to having changes in your withholding or estimated tax payments.

Can you decline the advance of the Child Tax Credit?

To avoid owing taxes or if you like to get a big refund to help your budgeting, the IRS will provide an option to decline the advance payments. They will announce how to do this closer to when the payments start.

Another option is to adjust your income tax withholding at work or to recalculate your estimated tax payments.

Is the advance income?

The advance payments are not income. They are a tax credit that is being paid early instead of you having to wait until you file your tax return. There is no tax on these payments.

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