I’m not saying that you had kids for the tax breaks, but no one at Briefly Taxing would judge you if this consideration didn’t play a small role in the decision to bring your dependents (children, rather) into the world. With that having been said, let’s talk about the 2021 child tax credit.
Congress Had Kids, Too (Apparently)
Like a groundhog seeing its shadow in February, at some point in 1997, Congress chanced upon its collective parental conscience, and enacted what is now referred to as the Child Tax Credit. The Child Tax Credit hearkens back to a chilly October day in 1976, when the Child and Dependent Care Tax Credit was established. Only one year prior, Congress enacted the Earned Income Tax Credit.
In bygone years, there was even a dependency exemption, but this exemption went the way of Old Yeller and itemized deductions with the tax reform in 2019. Taken together, these credits reduce your tax, dollar-for-dollar, and they soften the blow of ever having to utter the phrase to your four-year-old “I will say this for the last time; it is not ok to pee in the bushes at church—even if the priest laughed.”
The Numbers for the 2021 Child Tax Credit
In 2020, the Child Tax Credit was a flat $2,000 for every child under the age of 17. The Child Tax Credit for 2021 (and so far, only for 2021) has been raised to $3,000 per child (ages 6-17) and $3,600 per child (under 6 years old). In the past, the credit was available only to offset your taxes when you filed your return. Now, however, half of the credit ($1,500 / $1,800) will be available from July to December in equal, directly deposited monthly payments ($250 / $300) .
The Phase Out
Many, but not all, families will qualify for the higher credit. It begins to phase out when an individual filer has an adjusted gross income of $75,000, when a head-of-household filer has an AGI of $112,500, and when joint filers combined AGI is over $150,000. (AGI is simply your income, less deductions.) The phaseout is $50 for every $1,000 over the threshold amount.
So, if joint filers have two toddlers and an AGI of $200,000, the credit would be reduced by $1,000 ($50 x 200) to $2,600 per ankle biter. Families with AGIs above the $400,000 (joint filers) / $200,000 (single or head-of-household filers) thresholds will have their base $2,000-per-child credit reduced by $50 for each $1,000 of AGI over those thresholds.
When do the Payments Start?
The “plan” is to begin payments on July 15, 2021. This presupposes that the IRS gets its collective administrative act together, which historically has not been its bailiwick. Each payment would be made on the 15th of each month, July through December 2021.
A Few Provisos
If you accept the monthly payments, you will be left with one half to claim as a credit on your return. So, if you have twin threenagers, you will receive $3,600 ($600 / month), and you will be left with $3,600 as a tax credit to offset your income tax liability for tax year 2021.
Opting Out of Upfront Payments
If you do not want to receive monthly payments, the IRS will respect your prerogative, but you’re going to have to work for it. The upfront payment scheme is the default, and you will have to navigate the soon-to-be-created online portal to find the hidden box to opt out after providing your social security number, your great-aunt Helga’s maiden name, your blood type, and the true identity of your high school mascot. (I’m just guessing here.)
Empty Nesters
Other dependents—including children aged 18 and full-time college students ages 19–24—can receive a nonrefundable credit of up to $500 each.
In Sum
The 2021 Child Tax Credit is Congress’ version of a limited time offer on a used minivan. For 2022 and forward, Congress will need to talk to their manager (read: vote to extend the enhanced credit). For 2021, however, the enhanced Child Tax Credit will provide many families a financial boost in the second half of 2021.
However, you should understand that this is not a complete financial windfall. (With the IRS, it never is.)
Although the credit rose $1,000 (for children 6 and over) and $1,600 (for children under 6), half of this “enhanced” credit will be paid out from July to December 2021. Crunching the numbers, this means that instead of having a $2,000 credit per child available at tax time, families with children 6 and over will only have a $1,500 credit per child left, and families with children under 6 will have an $1,800 credit left per whippersnapper.
If you have any questions, reach out to me at scott@brieflytaxing.com.
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