Home Financial Education Child Tax Credit 2021: A Quick Guide

Child Tax Credit 2021: A Quick Guide

Published June 2021 by Jordan Semprevivo
Child Tax Credit Image

The 2021 child tax credit modifies the rules of the 2020 child tax credit as part of the American Rescue Plan. Its goal is to reduce child poverty, giving American families a welcome post-COVID-19 financial boost.

Key Points:

  • In 2021, the child tax credit will increase for eligible households. Those taxpayers will receive monthly $300 or $250 advance payments, starting July 15.
  • Even those who earn no income and pay no taxes are now eligible for the child tax credit.
  • The 2021 rules have expanded eligibility to 17-year-olds, including those who turn 17 this year.
  • Your eligibility depends on the Adjusted Gross Income (AGI) from your tax return.

Applying Your Child Tax Credit to Pay Down Debt

How can you make the most of any child tax credit you are eligible to receive? For families whose income has not been drastically reduced by the pandemic, the child tax credit amounts to a minor, recurring windfall.

A smart first priority for how to use the credit may be to build up an emergency fund. If the pandemic has taught society any lesson, it is that unexpected things can crop up, impacting your family’s income more quickly than you may have previously imagined.

Once you have built up a reasonable emergency fund, you may want to use any incoming tax credits to pay down credit card debt, the most expensive type of debt. The more you can add to the minimum payment due on your credit cards each month, the faster you can achieve financial freedom.

But what if the tax credit is not enough to substantially reduce your debt? If you have over $10,000 in credit card debt, debt settlement may be an option to explore. Among all the various forms of debt resolution, debt settlement enables you to pay less than your principal balance owed. You can talk with a ClearOne Certified Debt Specialist at 866-481-1597 to learn more about how debt relief works.

Who Will the 2021 Child Tax Credit Impact?

The Biden administration estimates that the 2021 child tax credit rules will positively impact 39 million families. Most of the new provisions of the Tax Credit are temporary. Here are some of those provisions, according to the IRS:

  • 17-year-olds qualify for the child tax credit under the new rules.
  • The tax credit amount goes from $2,000 per child to $3,000. For children under 6, the 2021 tax credit is worth $3,600.
  • The 2021 child tax credit becomes fully refundable without a $2,500 earned income requirement.
  • Instead of a single annual tax refund, the IRS distributes the funds monthly, in the form of $300 payments for children under 6 and $250 payments for children between 6 and 17.

Starting July 15, qualifying US families will receive $300 per month per child under 6. Here’s a deeper dive into how the revised rules work and what they may mean for you and your family.

Child Tax Credit 2021 Eligibility

The child tax credit is a form of financial help for US families designed to help those who need it the most. Higher-income families do not qualify for this tax credit. To establish eligibility, the IRS uses the information you provide on your tax return.

  • The child tax credit begins to phase out at $75,000 of adjusted gross income on single taxpayer returns, $112,500 on head-of-household returns, and $150,000 on joint returns.
  • The rate of the phase-out is $50 for every $1,000 over the mentioned AGI limits. The phase-out only applies to the $1,600 (or $1,000) extra tax credit that the 2021 rules have added. It does not affect the “base” $2,000 tax credit.

Example: If you are a single person with a 3-year-old child and an AGI of $85,000, you get $500 less (50x10, since you are $10,000 over the limit). Therefore, instead of $3,600, you get $3,100. With a 17-year-old, you would get $3,000-$500 = $2,500.

  • To be eligible for the tax credit, your child must be a US citizen, national, or resident alien with a social security number. The child has to be your dependent, as reported in your 2021 return. You cannot claim a tax credit for a child who is not related to you or has not lived with you for at least six months over the last year.
  • Families with AGI’s over the mentioned limits may be eligible for the $2,000 tax credit without the extra amounts the 2021 rules stipulate. The upper AGI limit for such families is $400,000 on joint returns and $200,000 on other returns. Above these limits, the tax credit begins phasing out at the rate of $50 per $1,000.
  • Children who turn 17 in 2021 are eligible for the higher 2021 tax credit, provided they fulfill all the other eligibility requirements.
  • Earning at least $2,500 is no longer an eligibility requirement. Provided they meet all the other eligibility requirements, parents can claim the higher child tax credit without being employed or having an income. They will receive the credit as a refund even if they owe no taxes.
  • Even families who are not legally required to file a tax return are eligible for the tax credit if they fulfill the other requirements. The IRS will work out special procedures for such beneficiaries.
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The 2021 child tax credit is fully refundable.

Advance Payments. Who Gets Them and When?

If you qualify for the $3,000 or $3,600 child tax credit, you will get half of it in $300 or $250 monthly installments. You will receive the rest as a tax refund.

  • You get a total of six monthly tax credit payments, spanning the period from July to December.
  • The IRS makes the payments on the 15th day of the month unless the 15th falls on a weekend or a holiday. In that case, payments should go through on the first business day after the 15th.
  • The IRS deposits the due sums into bank accounts or mails debit cards/checks to recipients.

Be aware that if your income situation changes through 2021, affecting your child tax credit eligibility, you can update your information with the IRS through an online portal. If you have a new baby in 2021, you can update your information through the same portal to gain tax credit eligibility.

If you find yourself struggling with debt despite tax refunds and credit payments, seek debt relief through other means. ClearOne Advantage’s Certified Debt Specialists are standing by at 866-481-1597 to help you design a plan that fits your budget. Contact us today to get a free savings estimate.

Credit Card Relief - Free Savings Estimate

The Content is for informational purposes only, you should not construe any such information on this website as legal, tax, investment, financial, or other advice. All Content on this site is information of a general nature and does not address the circumstances of any particular individual or entity. Nothing in the Site constitutes professional and/or financial advice, nor does any information on the site constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. Please consult a tax professional for personal tax advice.

Topics: Financial Education