Included as a part of the American Rescue Plan Act of 2021 was an enhanced child tax credit provision that increased the child tax credit from $2,000 to $3,000 with an additional $600 for kids under the age of 6 ($3,600/year for kids under 6). This credit is a fully refundable credit, meaning you can receive the full amount even if it exceeds your tax withholdings.
The enhanced credit is only available for 2021 and the original credit will continue into 2022.
The credit has two different phase-out ranges:
- The original $2,000 credit per qualifying child is phased out at $50 for each $1,000 of adjusted gross income over $200,000 for an individual or $400,000 for married filing jointly taxpayers.
- The additional/enhanced part of the credit in the amount of $1,000 or $1,600 for children under six, is phased out at $50 for each $1,000 of adjusted gross income over $75,000 for single filers and $150,000 for married filing jointly taxpayers.
Also included in the enhanced child tax credit are automated monthly payments of this credit that began on July 15th and will be sent out on the 15th of each month for the remainder of 2021. The automated monthly payments will be calculated based off your most recently filed tax return and are prepayments of this 2021 credit. This can lead to taxpayers receiving advanced payments of a tax credit they may not be entitled to receive if their 2021 income is vastly different than their 2020 income. The taxpayer would then be responsible for repaying a portion or all of the advance payments they received when filing their 2021 return.
Those taxpayers who would like to opt-out of these advanced payments of the credit may, by doing the following:
An account must be established with the IRS using a third-party website called ID.me which requires the taxpayer to verify their identity by scanning their drivers license or passport, providing your social security number and using a computer or mobile phone camera to scan your face to compare with your ID photo.
For more information on opting out of these advanced payments you can visit the following website: https://www.irs.gov/credits-deductions/child-tax-credit-update-portal
If you have any questions on the possible effect this could have on your 2021 tax filing, please reach out to your SDK Tax Advisor.