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The families of roughly 60 million children received their first installment of the enhanced Child Tax Credit payments on July 15. We’re here to bust some of the common misconceptions surrounding the payments.
1. You can keep these payments.
Many families have expressed concern over keeping the money fearing they’ll have to pay it back when they file their return in 2022 – but that’s simply not the case for most.
This money is an advance of the Child Tax Credit eligible families normally would claim on their 2021 tax return. If you haven’t experienced a significant increase in your income from 2020 to 2021 (and we mean hundreds of thousands), there is no reason to sweat having to pay the money back. It is yours to keep and put to good use.
2. The payments are not taxable.
That’s right – this money is not taxable on your 2021 tax return. Like the stimulus payments, the money is an advance of a tax credit that applies to your 2021 return. It is not considered taxable income.
When you file your 2021 return next year, you will reconcile the monthly payments you received from the IRS in 2021 with the Child Tax Credit on Form 1040.
3. This is what influences your payment amount.
Eligible families qualify for up to $300 per month for each child younger than six and up to $250 for each child aged six to 17. Over a 12 month period, that equals to $3,600 and $3,000 respectively per child. The newly-advanceable Child Tax Credit payments are designed to pay qualifying families in-advance half of the Child Tax Credit they qualify to receive based on their 2021 tax situation. That said, not everyone will receive the maximum amount for each child. Here are a few factors that could impact the size of your payment:
- Age requirement: Once a child reaches the age of 18, they are no longer considered an eligible dependent for the credit. Therefore, you shouldn’t expect to receive a payment for your child if they are age 18 or older by the end of 2021 regardless of whether you still claim them as a dependent on your return.
- Income limitations: Your income also impacts your monthly payment. Payment amounts are determined based on your 2020 tax return (or 2019 if your 2020 return hasn’t been filed or processed by the IRS yet). The American Rescue Plan made the Child Tax Credit fully refundable for 2021 versus only partially refundable (up to $1,400) in previous years. But the newly refundable expanded portion of the credit – which is valued at $1,000 for children age six and older and $1,600 for children age five and younger – is phased out based on income.
That extra credit amount begins to phase out for single filers who earn $75,000, head of household filers who earn $112,500 and joint filers who earn $150,000. The increased payment decreases by $50 for every $1,000 of income earned above those limits for each filing status.
Let’s look at two quick examples that include the same family but with two different adjusted gross incomes (AGI).
Example CTC Calculations
Scenario 1:
A single filing family with three children ages five, seven and 16 and an AGI of $60,000 qualifies them to claim the Child Tax Credit estimated at $9,600 based on their dependent situation. That also estimates their monthly payment to be $800 throughout the remainder of 2021.
Here’s how to do the math:
Step 1: Calculate the total value potential of the Child Tax Credit.
$3,600 for child age 5 + $3,000 for child age seven + $3,000 for child age 16 = $9,600 (total CTC value)
Step 2: Calculate the total value potential of the monthly payments.
$300 for child age five + $250 for child age seven + $250 for child age 16 = $800 (monthly payment)
Since the family’s AGI is below the income threshold, they will receive the full credit value each month.
Scenario 2:
The same single filing family with three children ages five, seven and 16 now has an AGI of $80,000 ($5,000 above the $75k income threshold). In this situation, that qualifies them to claim the Child Tax Credit estimated at $9,350 based on their dependent situation. That also estimates their monthly payment to be $779.
Here’s how to do the math in this scenario:
Step 1: Calculate the total value potential of the Child Tax Credit for this family.
$3,600 for child age 5 + $3,000 for child age seven + $3,000 for child age 16 = $9,600 (total CTC value)
Since this family’s $80,000 AGI is above the $75,000 income threshold for single filers, they are not eligible to receive the full credit. Their credit value will start to phase out at the $75,000 mark, making their monthly payment slightly smaller.
Step 2: Calculate the credit reduction based on the income threshold.
$80,000 (AGI) – $75,000 (income threshold) = $5,000
$5,000 is the amount of income this family has above the income threshold where the credit starts to phase out. The phaseout calculation is $50 less for every $1,000 above the income threshold.
$50 x 5 = $250
Since this family is $5,000 above the income threshold, their total credit value of $9,600 reduces by $250.
Step 3: Calculate the new Child Tax Credit values including the income threshold reduction.
$9,600 (maximum credit value) – $250 = $9,350 (new estimated total credit over 12 months)
$9,350 / 12 months = $779 (new estimated monthly payment)
4. Your refund next year likely won’t be much different.
As part of the American Rescue Plan, the Child Tax Credit underwent several adjustments, and one of those included increasing the maximum value of the credit. The credit increased from $2,000 to $3,000 per child between the ages of six and 17 and $3,600 for children under the age of six. Additionally, more of the credit is now refundable – meaning, if eligible, you will receive more credit dollars in your tax refund if it’s not needed to pay down any tax liability.
Because of that, eligible families shouldn’t expect to see too significant of a dip – if any at all – in their anticipated refund despite receiving part of the credit in advance. In most cases, the expanded value of the credit will offset any decrease you might have otherwise seen.
5. You can always opt out.
While there are very few instances where we recommend opting out of receiving these payments from a tax perspective, you always have the option to do so if you wish. Simply visit the IRS’ Child Tax Credit Update Portal to opt out. (Note: If you are a joint filer, both you and your spouse will need to opt out to stop the payments.)
You can opt out of the payments at any point throughout the remainder of the of year. To affect your payment, make sure to opt out by the following deadlines:
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