Family Finance: What Parents Should Know About the New Child Tax Credit

The American Rescue Plan puts money in parents’ pockets now instead of when they file taxes. But for some people, it makes sense to opt out.

Jennifer Wray
Jennifer Wray

Who doesn’t like a bit of unexpected cash? For the approximately 39 million families set to benefit from the American Rescue Plan, which expands tax credits for qualifying minor dependents, the payments that began in July could feel like a windfall. And for many households, especially the neediest, it is. After all, the plan is expected to “cover an estimated 88% of American children and lift more than 5 million children above the poverty line,” according to the nonprofit Brookings Institution.

Of course, even families in more comfortable financial positions stand to benefit from the more generous Child Tax Credit, and for many, the process to receive the money—$300 per month for each child age 5 and younger, $250 for ages 6 and older—has been simple enough: If you filed 2019 or 2020 taxes or signed up to receive a stimulus check from the Internal Revenue Service, the money automatically landed in your bank account or as a paper check in your mailbox. While it may be tempting to take those monthly payments no questions asked, there are situations in which it makes sense to wait.

But first, some background.

By the Numbers

The American Rescue Plan, a wide-ranging initiative that includes the expanded Child Tax Credit, was signed into law on March 11, 2021, as part of COVID-19 relief legislation. It is set to expire after a year, though President Joe Biden is advocating that it be made permanent. Changes to the Child Tax Credit include:

●     An increase in the credit from $2,000 per child in 2020 to $3,000 each for ages 6 and older and $3,600 for younger children.

●     The age limit was raised from 16 to 17.

●     Previously, parents had to have an annual income of at least $2,500 to qualify. There is no minimum income requirement for 2021, and low-income families can use the IRS Non-filer Sign-up Tool (whitehouse.gov/child-tax-credit/sign-up) to get the credit and receive any missing stimulus payments.

●     The expanded credit is fully refundable, which means that families who do not owe federal taxes will get the full amount.

●     Families get the full credit if their 2020 taxes had adjusted gross income of no more than $112,500 for a single-parent household or $150,000 for a couple. It phases out for higher incomes.

●     Wealthier families can still claim a credit of up to $2,000 per child, though it begins to phase out at $200,000 in adjusted gross income for single/head-of-household filers and $400,000 for married couples filing jointly.

●     Monthly payments will continue through the end of 2021. Families will get the remainder of the credit when they file their taxes in 2022.

Effect on Taxes

In typical years, parents get the Child Tax Credit when they file taxes—essentially, months after they may have needed the money. The American Rescue Plan is intended to give families more immediate support at a time when many are impacted by the double whammy of financial losses and extra expenses brought about by the COVID-19 pandemic.

Still, you don’t have to take the monthly payments—and there are legitimate reasons why some households opt not to. It could be psychological: Getting a lump sum eliminates the temptation to fritter away the installments. Or, there could be a logistical reason: Only one parent can claim the credit each year, which poses a challenge for divorced parents or unmarried couples.

In these cases, it’s common for the parent who has the greater share of custody to receive the credit. But other times, especially where couples split custody evenly, they may alternate the credit. And that’s where things could get complicated this year. The monthly payments are advance credits for 2021 taxes, but they are based on already-filed 2020 tax returns. This means that the parent claiming the dependents for 2021 should receive the money. In these situations, parents who got the credit for 2020 and are not due to receive it for 2021 might want to waive the monthly payments to avoid having to repay them.

Those who wish to opt out of the monthly payments can do so through the online IRS Child Tax Credit Update Portal, which is also a resource for parents who will claim dependents for the first time in 2021. The IRS plans to have a mechanism in place by late summer for parents to revise their information on file.

There are a number of moving parts to the expanded Child Tax Credit, and it’s not clear if its provisions will last beyond 2021. For more information on the American Rescue Plan and what it could mean for your family, see the fact sheet from the White House at childtaxcredit.gov and find additional information from the IRS at irs.gov/childtaxcredit2021.

Jennifer Wray is a freelance writer, mother and fan of all things pop culture.

This story is from the Fall 2021 issue of Columbus Parent.