child tax

What to Consider if You Receive the Monthly Child Tax Credit Payments

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The first payment of the Child Tax Credit started hitting bank accounts on July 15 and will continue every month for the rest of 2021. 

The monthly distribution was a change that came with the American Rescue Plan earlier this year – which also raises the credit to $3,600 for each child under 6 and $3,000 for children ages 6 to 17. The credit was $2,000 for each child in 2020. However, rather than receiving the $3,600 or $3,000 as part of your annual tax filing, most Americans will receive monthly payments of $300 each month between now and the end of the year, totaling $1,800. You will then receive the rest of the tax credit as part of your annual filing. 

The goal of the monthly distribution is to get money to Americans sooner and more spread out to help cover basic needs and make more of an impact for lower-income families. You are eligible to receive these monthly payments as long as you received the Child Tax Credit as part of your 2019 or 2020 tax filing and your child does not turn 18 this year.

However, there are income limits to consider. 

Child Tax Credit and Income Limits

Single tax filers earning less than $75,000 and those married filing jointly earning less than $150,000 will receive the full $3,600 or $3,000 per dependent child. The credit then phases out, being reduced $50 for every $1,000 of income over the limit.

Even if you are over the adjusted gross income limits for the additional tax credit, you still may be eligible for the original $2,000 credit. Those phaseouts begin at $200,000 for single filers and $400,000 for married filing jointly. 

Child Tax Credit Income Limits and Phaseouts

Income  Credit for Each Child 0-6 Credit for Each Child 6-17

Single: Up to $75,000 

Married Filing Jointly: Up to $150,000

$3,600 $3,000

Single: Up to $95,000 

MFJ: Up to $170,000

$3,600 minus $50 for every $1,000 in income over $75,000 for single filers and $150,000 for MFJ.  $3,000 minus $50 for every $1,000 in income over $75,000 for single filers and $150,000 for MFJ. 

Single: $95,001-$200,000

MFJ: $170,001-$400,000

$2,000 $2,000

Single: $200,001-$240,000

MFJ: $400,001-$480,000

$2,000 minus $50 for every $1,000 in income over $200,000 for single filers and $400,000 for MFJ.  $2,000 minus $50 for every $1,000 in income over $200,000 for single filers and $400,000 for MFJ. 

Source: IRS.gov

There is also a tax credit available to account for dependents who are 18 – and those who are full-time students between the ages of 19-24. This is a one-time $500 credit and the student must be claimed as a dependent. 

Monthly Payments

The purpose behind the monthly payment structure is to get money to Americans now, especially lower income families who may be facing hardship during the COVID-19 pandemic.

The monthly payments are set to occur around the middle of each month between now and the end of 2021. If you filed your 2020 taxes, your payment will be distributed the same way as your tax return – electronically deposited to your bank account or you’ll be sent a check. If you did not file for 2020, your 2019 tax filing will be used. 

When you receive your payment may vary (as it did with other relief payments), but the IRS plans distribribution on these dates in 2021:

  • July 15
  • August 13
  • September 15
  • October 15
  • November 15
  • December 15

Qualified individuals were automatically enrolled in the monthly $300 payment model. However, remember that the qualifying factors were taken from 2020 tax information. If you end up making more money in 2021 or your child is no longer a dependent, you may not qualify for the full payment – or you may phase out of the tax credit altogether. 

Planning Considerations for the Child Tax Credit  

So what if you receive the $300 each month but your situation in 2021 disqualifies you from the payment? Essentially there are two options.

  • Do nothing and account for it when you file for 2021. If your income is still within the range to receive the $2,000 per child but not the additional $1,600 or $1,000, you are basically just getting $1,800 of the $2,000 up front, and you’d essentially be left with a $200 credit when you file. If you had a large income event that pushes you all the way out of the $400,000 income limit for the $2,000 credit, you’d owe back the $1,800 you received as part of your filing. In that case you’d likely want to consider Option 2.
  • Opt out of the monthly payments. You can opt out of the $300 monthly payments via the IRS website. You’re able to do this regardless of income level to collect your credit when you file your 2021 taxes. However, it’s especially important to opt out if you think you may exceed the income limits. If you received the July payment and think you’re going to be ineligible for the Child Tax Credit, you’ll likely owe that back as part of your tax filing. 

Income limits aside, there are other planning considerations for families. If you had a child in 2021 or are going to have a child before the year ends, you wouldn’t receive advance payments for that child. In this case, you can either update your information to begin receiving the $300 per month or you can collect the credit with your 2021 filing. 

In addition, if you’re receiving payments for a child who is no longer your dependent, you may have to owe that money back. An example of this could occur if a child moved in with the other parent after a divorce. Think ahead to if that child will be counted as a dependent when you file your 2021 taxes. If they won’t be your dependent, you should update your information on the IRS website or risk having to pay the money back during tax season. 

If you need to make any updates to your information with the IRS, this schedule shows when specific changes can be made: 

Tentative Date You Can Make Changes What You Can Do
June 21
  • Find out if you’re eligible
  • Unenroll from payments
  • See a list of your payments
June 30
  • Make changes to your bank information for your payments, effective in August
Early August
  • Make changes to your address
Late summer
  • Make changes to your dependents, marital status and income
  • Re-enroll if you previously unenrolled

Going Forward

The Child Tax Credit changes from the American Rescue Plan are in effect for 2021 tax filing season. For 2022, the tax credit will go back to its 2020 levels of $2,000 per child, which was introduced as part of the Tax Cut and Jobs Act in 2017. 

For an extra wrinkle, the Tax Cut and Jobs Act created this as temporary tax credit and set an expiration date of 2025. If no new legislation is passed before then, the Child Tax Credit will revert back to $1,000, which is what it was prior to 2017.   

If you’re receiving the Child Tax Credit and questions on how it may impact your financial plan, reach out to your advisor today or schedule a discussion with someone on our team and we’d be happy to discuss your situation. 

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