The Child Tax Credit in 2021

If taxes aren’t confusing enough, the Child Tax Credit will change substantially in 2021, impacting 2020 filings and beyond. These changes will add complexity to filing for couples going through a divorce. The new tax credit will also create complications for divorced parents with dependents if the child credit is typically alternated between the parents. 

In this post, we dive into the details of this new Child Tax Credit and what it means for you.

Basic Details

Let’s start with the basic details of this new credit. Starting with 2021 filings, the Child Tax Credit offers up to $3,000 per qualifying dependent, which is a child 17 or younger on December 31, 2021. The credit increases to $3,600 if the child is under 6 on December 31, 2021. For comparison, in 2020, the Child Tax Credit was $2,000. As a reminder, this is a tax credit and therefore it reduces your tax bill dollar-for-dollar.

Qualifications

While these new Child Tax Credits apply to anyone with a dependent, the dollar amount of the credit begins to phase out with incomes over the following amounts:

  • For the 2020 tax year: 
    • $400,000 for married filing jointly
    • $200,000 for everybody else
  • For the 2021 tax year: 
    • $75,000 for single filers
    • $150,000 for married filing jointly 
    • $112,500 for head of household

Other Eligibility Requirements

The child must qualify as a dependent to you and/or an ex-spouse. Dependent requirements include:

  • The child lives with you (or the other parent) for at least half of the year. 
  • You or the other parent provide at least 50% of the child’s cost of living and support.

If the child does not live with you the majority of the year but you have a divorce agreement that allows you to claim the child credit in specific years, the custodial parent must sign Form 8332 and provide it to the non-custodial parent to file with their taxes.

In order to take the Child Tax Credit for the 2020 tax year, the child has to be 16 or younger on December 31, 2020. To be eligible for the Child Tax Credit for the 2021 year, the child has to be 17 or younger on December 31, 2021.

In addition to these eligibility requirements, you and your child must be U.S. citizens to take advantage of the Child Tax Credit.

Monthly Advanced Payments

In addition to the changes above, for the 2021 tax year, there are special Child Tax Credit rules due to COVID. These are designed to help Americans recover from the financial strain the pandemic put on jobs and families. The specific rules are part of the American Rescue Plan Act of 2021 and provide parents with the option to receive half of their 2021 child tax credit in the form of monthly advanced payments, and receive the other 50% on their taxes (when they file for 2021). 

To take advantage of these monthly advance payments, you can use either your 2019 or 2020 income, depending which one has been filed, to determine if you qualify for advanced credit payments to calculate your tax credit. The IRS will use your most recent tax return to determine whether you qualify for the Child Tax Credit and to determine your kids’ age requirements.

In this cash payment program option, you get six monthly payments starting in July and running through December of 2021. For example, if you qualify for a $6,000 Child Tax Credit for two kids, you can get six $500 payments, monthly, between July and December (for a total of $3,000) and then claim the remaining $3,000 on your taxes when you file for the 2021 tax year.

Of course, you can still claim 100% of your 2021 Child Tax Credit on your taxes when you do your 2021 taxes, if you so chose. The advanced monthly payments are simply an option.

Due to the income qualifications for the Child Tax Credit decreasing substantially this year, it is possible to receive advanced monthly payments for this credit based on 2020 tax returns and having too high of an income in 2021 to qualify, due to these lower income qualification requirements. If you receive advanced payments and do not qualify when you file your 2021 taxes, you may not have to pay back the overpayment (unless your actual 2021 income is above a certain amount). Here are details you need related to repayments:

  • Families with 2021 adjusted gross income at or below $40,000 on a single return, $50,000 on a head-of-household return and $60,000 on a joint return won’t have to repay any credit overpayments that they get. 
  • Families with 2021 adjusted gross incomes of at least $80,000 on a single return, $100,000 on a head-of-household return and $120,000 on a joint return will need to repay the entire amount of any overpayment when they file their 2021 tax return next year.
  • Families with 2021 adjusted gross incomes between these thresholds will need to repay a portion of the overpayment.

Next Steps

As you can see, the Child Tax credit may create some challenges when parents have an every-other-year arrangement to receive this credit or have had a significant change in income due to COVID or a recent divorce. We can help. The team at A.M. Financial can help you understand how the new requirements and opportunities available with the 2021 Child Tax Credit can help you save money in your divorce and/or plan the best arrangement for sharing this tax credit with your former spouse. Contact us today for a free consultation.

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