September 18, 2021
Child Tax Credit, More Important Than Ever in Divorce Negotiations
This article written by Richard Rubin and published in the September 14, 2021 Wall Street Journal explains why the Child Tax Credit is now a far more important component of the divorce settlement than ever before.
Child Tax Credit Payments 2021: Who Is Eligible and How Much Are They?
Tax credit is a federal benefit that reduces income tax liability for people with children
By Richard RubinUpdated Sept. 14, 2021 3:43 pm ET
The third monthly payments of the child tax credit are about to hit Americans’ bank accounts Sept. 15, continuing an experiment in family and fiscal policy. Democrats tout the monthly payments as a way to reduce child poverty and change annual lump-sum tax refunds into a more reliable stream of income. Republicans have criticized the changes for breaking the prior link between the credit and earned income.
The child tax credit is a federal benefit that reduces income tax liability for people with children. It was created in 1997 and since then has expanded several times. It is a credit that reduces taxes owed as opposed to a deduction that reduces taxable income. The temporary changes in effect for 2021 make it a near-universal monthly child allowance, far from the annual tax break it started as. The changes came about as part of the $1.9 trillion Covid-19 stimulus law passed in March.
Here is how it works.
How big is the credit?
Until 2021, the credit was $2,000 per child under age 17, based on the child’s age at the end of the year. For 2021 only, Congress increased the credit to $3,000 for children ages 6 to 17 and $3,600 for children under age 6.
Are there limits based on income?
On the low end, there were limits, but they have been removed for this year. Until 2021, low-income households that didn’t owe income taxes could get as much as $1,400 of the $2,000 credit. This year, they can get the full credit even if they have no income.
On the high end, some limits are still in place. The expanded portion of the credit starts phasing out once income reaches $75,000 for individuals, $112,500 for heads of household and $150,000 for married couples. The base $2,000 credit for higher-income households remains, and that phases out once income reaches $200,000 for individuals and $400,000 for married couples.
When do the monthly payments start?
The Internal Revenue Service made the first payments on July 15. They will continue monthly for the rest of the year on the 15th of every month, unless that falls on a holiday or weekend.
How big will the payments be?
Each month, households will get one-twelfth of the annual credit, so they will generally have half the credit by the end of 2021 and get the rest on the 2021 tax return they will file in early 2022. So a single parent who makes $60,000 and has an 8-year-old would get $250 a month starting in July.
The IRS has sent out letters to households detailing their estimated payments.
How many people are getting the payments? And what does it cost?
The first set of payments was about $15 billion covering nearly 60 million children, according to the Treasury Department, and the second set reached about 2.7% more children. Most of the money went out through direct deposits, though some people who received direct deposits in July had checks mailed to them in August because of a technical problem. The expanded credit is expected to cost the government just over $100 billion this year.
Why is the government making monthly payments?
Advocates for the expansion say the program can be more effective in helping parents and children if they have the money sooner rather than waiting to file a tax return to get it.
Will the payments reduce people’s expected tax refunds?
Perhaps. A household that was expecting to use the $2,000 credit against its 2021 tax liability in early 2022 will instead get $1,000 during the second half of 2021 and only have $1,000 more on the return.
That may be less of a concern for some households because of the expanded size of the credit and because only half of it is coming in advance through the monthly payments. So a married couple making $120,000 with a 3-year-old and a 9-year-old would have normally expected to have a $4,000 child tax credit on the tax return. Now, they will get $3,300 during 2021 and will have the other $3,300 on the tax return.
Some households will get a break on the amount they would otherwise have to repay, if their incomes are below $40,000 for individuals and $60,000 for married couples.
The IRS will send people notices at the end of the year that they can use when reconciling the payments with the ultimate credit.
Do you have to do anything to get the monthly payments?
In most cases, no. The IRS will use information from 2019 or 2020 tax returns to establish eligibility and make payments. About 80% of recipients have direct-deposit information on file with the IRS and will get the payments automatically. Others will receive paper checks or debit cards.
Can you decline the payment?
Yes. The IRS has set up an online system that lets people opt out of monthly payments if they prefer to claim the entire credit on the tax return. The IRS also set up a system, the Child Tax Credit Eligibility Assistant, that lets people figure out whether they can get the money. People can use the Child Tax Credit Update Portal to provide the IRS with new bank account information. About 1.6 million individuals opted out as of August, according to the Treasury. In the future, the IRS will debut systems that will let people update their family status, income and address.
What if you don’t normally file tax returns?
The IRS established an online system that lets non-filers—typically very low-income households—provide their information to the government. This is similar to the online tool the government used for the stimulus payments last year and this year. The Treasury said it is working to make its systems work better on mobile phones and for people who don’t speak English.
Are other tools available to help people sign up?
Yes. Code for America, a nonprofit working with the Biden administration, released a new sign-up system Sept. 1. It is aimed at very low-income people who don’t typically file tax returns. The tool is designed to work better on mobile devices than existing tools do, and it is available in both English and Spanish. The tool is available at www.getCTC.org. Gene Sperling, a White House official, said the administration will be promoting the tool through its outreach efforts.
Can you update your bank account and family information? Or add a baby?
The IRS is setting up systems that let people update their information more frequently than the annual tax return, and people can now update their bank account information and mailing address. Future iterations are expected to allow for changes in income, child custody and family size, including new babies whose parents would be eligible for the payment. People who sign up for the payment after the first ones go out will get somewhat larger payments to make up for any missed ones. The IRS is regularly updating its detailed information and questions and answers. The White House has made more information available at www.childtaxcredit.gov.
What happens to the credit after 2021?
If Congress does nothing, the monthly payments go away and the credit returns to $2,000 per child under 17. President Biden wants to extend the current credit through 2025. Many congressional Democrats want to make it permanent.
Democrats on the House Ways and Means Committee are advancing legislation that would extend the expanded credit through 2025. That’s part of legislation that would raise taxes, expand renewable-energy tax breaks and create a national paid-leave program. In addition, the House proposal would make some features of the expanded credit permanent—the pieces that let households get the full credit even if they have little or no income.
What if a child died, but the family has begun receiving child credit prepayments? Will the family need to pay them back?
Some families with deceased children claimed on prior tax returns have reported receiving payments. In some cases the families will need to pay them back, and in others they won’t.
Here’s why: The IRS is making prepayments of the child tax credit based on 2020 tax returns in most cases, but if the 2020 return hasn’t been processed then the agency is using the 2019 return.
If the child died in either 2019 or 2020, the family isn’t eligible for the credit for that child for 2021. The parents will need to give back any prepayments on their 2021 tax return next year.
These parents will likely want to opt out of prepayments using the child-tax-credit update portal. Or they could raise their paycheck withholding or estimated tax payments this year to offset the prepayments and avoid owing more next spring.
Currently, the IRS systems don’t allow parents to opt out of prepayments for one child but not others. The agency hopes to add this function soon.
However, the tax outcome is different if the child died in 2021. In this case, the parents get the child credit for the full year (assuming they are otherwise eligible for them). They can continue receiving the payments and claim the rest of the child tax credit on the 2021 tax return.
—Laura Saunders contributed to this article.« Back to all news