With the American Rescue Plan that was signed into law in March included a provision that we talked about a month or so ago. This provision increases the child tax credit and changes the way that it is paid out.
Why don’t we start with a quick refresher?
- Yes, this would typically be rentals of your personal residence or vacation homes.
When is home considered to be a personal residence or vacation home rental?
- The child tax credit has been around since 1997 and started as a $500 per child non-refundable credit. That credit has increased to $2,000 in 2020 and part of it was refundable.
- Well beginning in 2021, the credit was increased to $3,000 for children age 6 to 17 and $3,600 for children under age 6.
- In addition to the increase, this credit will now be paid out in monthly installments.
Let’s take a step back, who is eligible for the credit?
- On top of the age limits that we talked about earlier, there are also income limits.
- The full credit is available for single individuals with an AGI of $75,000 or less. For married couples, the income limit doubles to $150,000. Over these amounts, the credit starts to phase out.
Were the phase-out limits higher before?
- Yes, and that is a good point.
- Those who phase out of the higher credit based on the $75k or $150k limits can still qualify for the $2,000 child tax credit that was available in 2020.
- To qualify for the $2,000 credit, your AGI has to be below $200k single and $400k married.
You also mentioned something about monthly installments?
- For those eligible for the higher $3,000 or $3,600 credit, the IRS plans to send out monthly payments of $250-$300 per month beginning in July 2021.
- This will be an advanced payment on the credit.
- So about half the credit will come in monthly installments and the rest will come when the tax return is filed.
There is talk that the first payments will not come out in July, what do you think?
- With the stimulus checks that they are still sending out plus the backlog of returns, this may be a fairly ambitious goal, so we will have to wait and see.
You mentioned to me before we started the show today that you have some concerns.
- The one worry that I have, is that people who are used to getting a large refund due to the child tax credit will see their refunds decrease. If they have plans for the larger refund each year, they may want to relook at those plans.
Lastly, is the expanded child tax credit for 2021 only?
- Yes, but there is talk in Congress about extending it
- And if this does continue into 2022, the monthly payments will make the year-end refunds even lower yet.
The child tax credit can be more complex than a person might think, so it is a good idea to talk to a tax professional to make sure you are doing it right.
As a partner, I have thorough experience providing tax services to individuals, privately held businesses, nonprofit entities and estates and trusts. I also provide compilation and review services.
