Many U.S. taxpayers with children may begin receiving monthly child tax credit (CTC) checks for the first time. The CTC, which is normally only refundable at tax time, will be distributed to eligible taxpayers in monthly installments beginning on July 15, 2021.1 A person may be eligible if they filed taxes in 2019 or 2020 and claimed the Child Tax Credit or given information to the IRS in 2020 to receive the Economic Impact Payment using the Non-Filers tool on the site and have a main home in the U.S. (where they’ve lived for at least half the year) and have a qualifying child under the age of 19. Income restrictions apply as well.2 For many taxpayers, this extra infusion of income may really boost the budget.
Child Tax Credit Increase
Effective in 2021, the maximum annual child tax credit is $3,000 per child (for those under age 18) and $3,600 per child (for children under age 6). This marks an increase of $1,000 to $1,600 over the CTC payments for 2020.
The CTC decreases your income tax liability. This means that those who owe federal income taxes may have a lower bill, while those who get a refund may see it boosted by the CTC. If you're not sure whether you're eligible to receive these CTC payments, you can use the IRS's online tool to check.2
Child Tax Credit Payments
For the first time ever, families who are eligible for the CTC may begin claiming these funds as soon as July 2021. Families with children under age 6 could receive $300 per month for each qualifying child, while families with children age 6 to 17 could receive up to $250 per month per eligible child. A family with children ages 3, 7, and 10 whose income qualifies them for the maximum CTC may receive $800 per month from the federal government from July through December 2021.3
However, you have the option to opt-out of these advance payments. In this case, the CTC you are eligible to receive is added to your tax refund (or used to reduce your tax bill) in April 2022, when you file your 2021 income taxes. Remember, if you decide to receive these funds during the 2021 year, you may end up owing money. If you've overpaid, your refund for 2021 is likely to be lower as well.
There's no one-size-fits-all answer to whether receiving these advance payments is the right choice. Consider factors like your monthly savings rate, the interest rate on any debt you have, and your overall budget flexibility when deciding whether to receive these funds in advance or at tax time.
Many parents may benefit from CTC payments now. This is especially true for families that get the earned income tax credit (EITC), which can only be refunded at tax time.4 For families with a negative federal income tax liability, it's not possible to under withhold your taxes enough to avoid getting a refund. By getting these CTC payments on a monthly basis, these families may add some breathing room to the budget while still receiving an EITC refund after filing 2021 taxes.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
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