Parents with children who are 17 years old and younger may be eligible for an advanced Child Tax Credit in 2021. The American Rescue Plan of 2021 expanded the credit from $2,000 to $3,000 or $3,600 per child and offers an advanced payment option.
Here are some important things to know about the 2021 Child Tax Credit, and how families can make the most of their payments.
How the Child Tax Credit Works in 2021
In prior tax years, parents received the Child Tax Credit when they filed their tax return. The credit offered up to $2,000 per child, and up to $1,400 was refundable.
For tax year 2021, qualifying parents will receive up to $3,600 for each of their children who are 5 years old or younger, and up to $3,000 for each child between the ages of 6 and 17. You can receive the credit as one large payment when you file your 2021 taxes, or you can receive half of your total credit as advanced payments.
The IRS will release a portal this summer where parents can update information such as income and number of children. There will also be an option to decline the advanced payments.
The amount of advanced payments is based on your 2020 tax return. If you haven’t filed your 2020 tax return yet, the IRS will use your 2019 return.
The Child Tax Credit is fully refundable for tax year 2021, which means you can receive a payment even if you don’t owe any income taxes. There is also a credit of up to $500 for 18-year-olds, and 19- to 24-year-olds who are full-time college students.
Who Qualifies for the Credit?
Parents who file a joint return and have a 2021 modified adjusted gross income (AGI) of $150,000 or less may claim the maximum credit. The income limits for single filers and heads of household are $75,000 and $112,000, respectively. For parents whose income is above the limits, the credit is reduced by $50 for every $1,000 in modified AGI.
To qualify for the credit, you must claim your children as dependents on your 2021 federal income tax return. Eligible children must be U.S. citizens, U.S. nationals or resident aliens, and they must have a social security number. The child also had to have lived with you for at least half of the year in 2021.
When Will Families Receive Advanced Payments?
Parents may choose to receive the full credit when they file their 2021 taxes, or receive a portion in advance. If you opt for the latter, you will receive six payments of $300 (or $250 for children between 6 and 17 years old).
The IRS will start direct deposits July 15 and send subsequent payments on the 15th of each month through December. When the 15th falls on a weekend or holiday, you will receive the payment on the closest business day. If the IRS doesn’t have your bank account information, they’ll send a paper check or debit card in the mail.
Smart Ways to Spend Your Tax Credit
An extra $3,000 or $3,600 per child can be a significant amount of money for most families. If your bills are up-to-date and you’re able to cover essentials, you may not know how to spend your Child Tax Credit.
Here are some ideas to consider:
Pay off debt
Whether you’re paying off credit cards or student loans, your debt can hold you back from saving for the future. Two popular strategies for paying off debt are the snowball method and the avalanche method. With the snowball method, you apply payments to the loan with the smallest balance. The avalanche method focuses on paying off the loan with the highest interest rate. Once you decide on a method, you can add the amount of your tax credit to your debt payments.
Start a college fund
If you haven’t already, consider opening a 529 plan for your child(ren). 529 plans offer tax-deferred earnings growth and tax-free withdrawals when you use the funds to pay for education expenses. Studies show that children are more likely to attend and graduate from college when they have a college savings account.
Save for an emergency
Experts recommend having at least 3 to 6 months’ worth of expenses set aside for an emergency. If you don’t have a sufficient emergency fund you can use your Child Tax Credit payments to get back on track.
Have some fun
If your family’s finances are already in order you might want to use the payments to pay for a monthly family outing. Your kids will be off to college before you know it, so it’s important to make the most of the time you have together.