Aug 10, 2021

Tax Update: Important Tax Credit Changes for 2021

Tax Planning

What is the child credit?

Prior to the American Rescue Plan Act of 2021 or the ARPA, the credit was up to $2,000 per child under the age of 17 and the credit was only partially refundable. Additionally, you could only request the credit when you filed your tax return.

Kindra Walker, CPA, CDFA®, Accountant Mediator, speaks with Georganne Ford about important child tax credit changes for 2021.

What do you mean by refundable?

Generally, you could not receive the credit if you did not have earned income above $2,500 and the refundable portion was limited to $1,400 per qualifying child.

What changed?

For 2021 only the credit has been increased to $3,600 per child under 6 and $3,000 for children under 18. The credit is also fully refundable, so taxpayers don’t need to have earned income to qualify. Also, instead of waiting to receive the credit until you file your tax return the IRS started issuing payments for up to one half of the credit in July.

Why is this especially important for parents in the divorce process to consider?

One of the tax issues that needs to be resolved during a divorce if there are dependent children is who will be able to claim the children on the tax return. Either parent can claim the credit regardless of custody status if the other parent releases the credit using the proper IRS form. However, because the IRS started issuing payments in July based on the filing status in the 2020 return, the allocation of those advanced payments will need to be addressed during the divorce process.

Is there a way to avoid the advance payments?

If the cash is not needed currently, it may be better to go to the IRS website and opt out of receiving the payments so parents have time to assess the best way to allocate the credits as part of the divorce settlement.

Will the child credit changes included in the ARPA continue past 2021?

The changes are supposed to be for 2021 only, but Congress has been known to extend popular tax provisions so we will keep you posted.