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The American Rescue Plan and Child Tax Credit

The American Rescue plan, enacted in March 2021, expanded the Child Tax Credit for working families by allowing the U.S. government to distribute up to half of the credit to eligible parents before the end of this year. Most people are automatically receiving monthly prepayments, which began on July 15th, 2021 and will continue through December. Not sure what all of this means? Well, here’s a quick rundown of the Child Tax Credit, the modifications made for 2021under the American Rescue Plan, and how it potentially affects you.

Tax credits are typically applied at the time of tax filing and are used to offset any tax liabilities. The Child Tax Credit usually provides parents with dependent children a credit of $2,000 per child under the age of seventeen. The American Rescue Plan temporarily increased the Child Tax Credit for the 2021 tax year only. You can now receive a credit of $3,600 per child under the age of six and $3,000 per child age six to seventeen. Therefore, you can expect to receive monthly prepayments of either $250 or $300 per eligible child if all requirements are met.

To qualify for the Child Tax Credit, your child must meet certain specific criteria:

  • Your child must be a U.S. citizen, national, or resident alien age 17 or younger.
  • You must be related to the child and claim him/her as a dependent on your tax return.
  • Your child must have a valid Social Security number and reside with you for at least half of the year.
  • You must provide at least half of their financial support during the year.

All families qualify for the full credit if your modified adjusted gross income (MAGI) is $112,500 for head of household filers, $75,000 for single filers or married filing a separate return, or $150,000for those who are married filing jointly. Once your income exceeds these thresholds, the IRS will begin to phaseout the child tax credit. If you have dependent children under the age of seventeen living in your home, you have likely received some of these automatic monthly prepayments (either by check or direct deposit) and will continue to receive them through the end of this year. However, you may want to consider opting out of receiving the monthly Child Tax Credit prepayments.

For example, if your income is too high, you may no longer qualify for the Child Tax Credit. Failure to opt out could have a significant impact on your family when filing your tax return next year. You will have to report any prepayments received that exceed what you are actually eligible to claim, which could either reduce the amount of your refund or increase the amount of taxes owed to the government. Therefore, if you expect your 2021 income to be significantly more than your 2020 income, you should consult your tax professional and consider opting out.

You may also want to opt out if you would prefer to receive your entire tax credit at once when filing your taxes. Some people prefer applying the credit directly to their tax liabilities. Be aware, though, spouses must unenroll separately from the monthly prepayments. If only one spouse unenrolls, the other spouse’s half of the monthly prepayments will continue.

To be clear, this is not the same thing as the economic stimulus funds that were previously distributed during the pandemic. Rather, it is a prepayment of the 2021 child tax credit, which you are opting to take now versus later. Therefore, it is important to take all relevant factors into consideration when determining whether your family should accept the prepayments or opt out of the program.

Other requirements, limitations, and restrictions may apply to your specific situation. If you have questions about your specific tax situation, you should consult a tax professional.


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