American Rescue Plan Changes to Child Tax Credit

Is the Child Tax Credit Increasing Due To the American Recovery Act?

Hey, folks, just want to take a quick minute or two to talk about the changes to the child tax credit. So the American rescue plan was just signed into law just recently by President Joe Biden. It’s the one point nine trillion dollar COVID relief plan. It includes a whole lot of stuff. It’s over 600 pages and I’m just diving into it. I’ve only read probably 200 of them so far. Essentially, what I want to talk about today is the child tax credit and the changes that are coming in this regard.

Will the Child Tax Credit Now Be $3000? Who Will Qualify?

So the first thing that you got to know is where the child tax credit has been and then we’ll look at comparative data. So the child tax credit has been two thousand dollars for each child, qualifying child on your tax return, who is under the age of 17. Now, this has changed to be three thousand dollars per child under the age of 18. So an extra year for those of you with angsty teenagers. Now, in regards to the the child tax credit, there’s one other little adjustment that has to do with the age, and that is for children under the age of six, the credit actually goes up to thirty six hundred. OK. All right. So now that you understand how this is going to impact your tax return to some degree next year, meaning your credit will be higher, credits are a dollar for dollar offset on tax, which means if your credit is going up 1000 dollars, then you should expect one thousand dollars less in tax.

How Do the Monthly Payments for the Child Tax Credit Work?

But this is where it kind of gets complicated because essentially what the bill also introduces is an advanced payment of the child tax credit. So consider for a moment that your child tax credit is increasing. And so what they’re going to do is they’re going to pay you essentially what is 50 percent of your child tax credit beginning in July, every month until December. So they’re going to take half of that credit or a three thousand dollar credit would be fifteen hundred dollars and pay it to you over a six month period. And so essentially, this is two hundred and fifty dollars each month. This is auto opt-in. So that means it’s going to automatically happen like the stimulus is auto opt in. You generally didn’t have to request for that to be sent to you if you filed a tax return and you qualify for the stimulus, you received the same kind of thing. My assumption is they will use the same account information as they used for your stimulus. But there’s some stuff there that we still don’t know. So for those of you with multiple children, this will be across each child. So if you have two children under the age of 18, but over the age of five, then that would be two hundred and fifty dollars times two this money would be coming into your bank account every single month.

Child Tax Credit Portal

The bill does require that they establish an online portal, kind of like, if you remember, the website that the IRS set up last year in twenty twenty in April in order to elect to receive the stimulus payments, it’s going to be something similar to that. Believe it or not, that actually worked pretty well. And I don’t generally praise the IRS too often. But I will say that that portal actually was very convenient and did its job. And so so I expect this one to be of a similar quality. You are able to, on this portal, opt out of receiving these monthly payments. Now, some of you might ask, why on earth would I ever opt out of receiving this monthly payment? And that’s for tax planning purposes. I have people every year who end up potentially owing money or they don’t have enough withheld over the course of the year and they rely on the child tax credit to offset some of the tax that they have that they’re not paying enough in. And if the federal government starts sending you this money as an advanced credit, really important verbiage there, it’s an advanced credit. They’re going to send you half of it up front, which means only the remaining half of the child tax credit is actually going to go to offset any tax.

Should I Opt Out of the Child Tax Credit Advanced Monthly Payments?

And so if you’re used to getting one or two hundred dollars back every year and you really like hitting that break even marker of hoping for zero and you’ve got young children, it’s not going to be zero next year if you allow this opt in to be sending you money every month. There’s a whole lot of complicated tax planning that can get into that. If you have questions about that, please let us know. But beyond that, the beyond the tax planning, beyond the the child tax. Oh, another thing to mention, actually, I almost forgot, is the child tax credit for those under the age of six. Again, 50 percent of that credit would end up being about 300 dollars a month. So for children five or younger then it’s then it’ll be three hundred dollars a month from July to December. For children over the age of five, but under the age of 18, it’s two hundred and fifty. So you got a couple of kiddos, you’re going to have some mailbox money coming your way. But if you don’t want to do that because you’re worried about it for tax planning purposes, you should consult with a competent tax advisor and we have quite a few of those here at Molen & Associates. So if you have additional questions about that, please reach out to us and let us know.

 

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