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What is the Child Tax Credit?

The Child Tax Credit (CTC) was enacted in 1997. In 2001, it was expanded with bipartisan support.[i]

The CTC helps working families offset the cost of raising children. Unlike a tax deduction, a tax credit is a dollar-for-dollar reduction in taxes.

Until 2021, it has been worth up to $2,000 per eligible child (under age 17 at the end of the tax year). The CTC also included a $500 non-refundable credit for families with qualifying non-child dependents.

The CTC includes a “refundable” provision. If the value of the CTC exceeds the amount of federal income tax a family owes, the family may receive all or part of the difference in the form of a refund check.

Unfortunately, some eligible families fail to claim the child tax credit, as their income is too low to require the filing of an income tax return, and they are unaware of the CTC and its potential benefits. The IRS has a Child Tax Credit Non-filer Sign-up Tool portal to use in these situations.

Taxpayers eligible for the credit subtract it from the total amount of federal income taxes they would otherwise owe. For example, if a couple with two qualifying children would owe $4,600 in taxes without the credit, they would owe $600 in taxes with it, because the credit would reduce their tax bill by $2,000 for each child.

 

How Has the Child Tax Credit Been Expanded for 2021?

Under President Biden’s American Rescue Plan, enacted in early 2021, the child tax credit has been expanded – but only for the 2021 tax year. Legislation is being proposed to continue the expanded child tax credit, in some form, for many more years, but the outlook for passage of such legislation remains unclear at present.

Here is a breakdown of some of the changes – for the 2021 tax year only:

  • The age of qualifying children was raised from 16 to 17.
  • It is a “fully refundable” tax credit (meaning you can receive it even if you do not owe the IRS any taxes). Before the passage of the American Rescue Plan, nearly 27 million children lacked access to the full Child Tax Credit (CTC) because their parents earned too little to owe federal income taxes. For 2021, the full CTC is available to virtually all low-income households.
  • Up to half of the Child Tax Credit may be received in monthly payments unless taxpayers opt out. Up to half of the year’s total tax credit will be given out via monthly checks from July 2021 through December 2021.
  • The Child Tax Credit amount has increased for certain taxpayers. The maximum credit is $3,600 for children younger than age 6 and $3,000 for children ages 6 through 17. However, income limits may result in a “phase-out” (reduction) of some or all of the CTC. Phase-outs of the 2021 CTC begin and end, based on 2021 modified adjusted gross income, by two different “phase outs”:
    • The Child Tax Credit begins to be reduced to $2,000 per child if your modified AGI in 2021 exceeds:
      • $150,000 if married and filing a joint return or if filing as a qualifying widow or widower;
      • $112,500 if filing as head of household; or
      • $75,000 if you are a single filer or are married and filing a separate return.

Note that this first phaseout reduces the Child Tax Credit by $50 for each $1,000 (or fraction thereof) by which your modified AGI exceeds the income threshold described above that is applicable to you.

    • The Child Tax Credit will not begin to be reduced below $2,000 per child until your modified AGI in 2021 exceeds:
      • $400,000 if married and filing a joint return; or
      • $200,000 for all other filing statuses.

Note that this second phaseout reduces the Child Tax Credit by $50 for each $1,000 (or fraction thereof) by which your modified AGI exceeds the income threshold described above that is applicable to you.

The Tax Policy Center estimates that 92 percent of families with children will receive an average CTC of $4,380 in 2021. Under prior law, 89 percent of families with children received an average CTC of $2,310.[ii]

Why Are Families with Minor Children Starting to Receive Monthly Checks?

Unlike prior years, beginning in July 2021, the expanded CTC will be partially paid in monthly installments, via direct deposit to your bank account from the Internal Revenue Service.

If you are a parent with minor children, your bank account likely received the first of several monthly payments on July 15. Monthly payments will continue from August through December 2021, unless you “opt out” of receiving the payments.

2021 Child Tax Credit Payment Schedule
Payment DateMaximum Payment for Each Child Age 5 or YoungerMaximum Payment for Each Child Ages 6-17
July 15, 2021$300$250
August 13, 2021$300$250
Sept. 15, 2021$300$250
Oct. 15, 2021$300$250
Nov. 15, 2021$300$250
Dec. 15, 2021$300$250
April 2022 (second half of total payment for 2021 tax year)$1,800$1,500

(Source: Internal Revenue Service)

 

Should You “Opt Out” of Monthly Payments?

Even if you have already received the first monthly payment, you can opt out of receiving additional monthly payments. Generally, you need to opt out at least two weeks before the next monthly payment date. Here are some of the instances where taxpayers may want to opt out:

  • If a taxpayer expects to owe taxes when they file their return next year, they might not want the advance payments now (as it would add to the amount they owe later).
  • If a taxpayer is paying estimated taxes (such as if the taxpayer is self-employed), they likely do not want to receive advance child tax credit payments. This is because the estimated tax the taxpayer is paying the IRS and the advance child tax credit payments that the IRS is giving the taxpayer are essentially netting each other out. In some instances, this could result in more tax (and potentially interest and penalties) owed when the taxpayer files their return, as a result of the application of the rules on the making of estimated tax payments.
  • If taxpayers are divorced or separated and alternate claiming dependents.
  • If a taxpayer’s income has increased from the prior year, which results in higher income taxes to become due, or if the phase-out of the CTC comes into play. The IRS bases the monthly payments based upon the modified adjusted gross income reflected on your tax return filed for the 2020 tax year (or 2019 tax year, if you are on extension). Accordingly, if your modified adjusted gross income is higher in 2021, this could result in higher monthly payments than those which you will be ultimately entitled to, which could lead to a discomforting additional income tax due come next April 15th.

Taxpayers can update their information to reflect any new information that might impact their child tax credit amount, such as filing status or number of children, using the IRS’ child tax credit and update portal.

Parents may also use the online portal to elect out of the advance payments or check on the status of payments.

 

How Might the Tax Credit Impact 2021 Tax Returns?

Taxpayers should also understand that these changes are temporary and only apply to the 2021 tax year. The decision to receive the child tax credit payments in advance will affect a taxpayer’s refund or amount due when their 2021 tax return is filed.

For those taxpayers who choose to receive advance monthly payments (i.e., they don’t “opt out”), they will either receive a lower refund or potentially owe tax (and possibly interest and penalties) that they would not ordinarily on their 2021 tax return, depending upon changes to their modified adjusted gross income over the past year or two.

 

This article was written by Ron A. Rhoades, JD, CFP®, Financial Advisor, and Brian Wright, CFP®, Senior Financial Advisor, both with ARGI Investment Services, Inc., as well as by Jacob Ward, CPA, Tax & Business Advisor with ARGI. If you are interested in personal financial planning services, please contact your ARGI Financial Advisor, or (for new clients) please visit: https://argifinancialgroup.com/contact-us/.

 

[i] “At the time, the idea of providing direct resources to households with children was picked up by conservatives as a non-bureaucratic way of supporting families. Progressives supported the reform, too, as an effective tool to prevent working families from being taxed into poverty. In the years since, the credit has been expanded by Democratic and Republican lawmakers alike, including as part of the Trump Administration’s Tax Cuts and Jobs Act.” Audrey Xu, “Five Facts About the Child Tax Credit,” Niskanen Center (June 21, 2021).

[ii] https://www.taxpolicycenter.org/briefing-book/what-child-tax-credit (retrieved July 25, 2021)