The child tax credit is a federal benefit that puts money back in the pockets of qualifying families. Money Girl covers what the credit is, who qualifies for it, and how to receive it as advance monthly payments in 2021.

18 minute read

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And welcome back to the money girl podcast. I’m Laura Adams, a leading finance and small business expert, and award-winning author. I’ve been writing and producing this show since 2008.

And I am so glad that you’ve downloaded this episode wherever you are in the world. I love connecting with you here and serving you every week. So I want to thank you for subscribing sharing the episodes with your friends and submitting ratings and reviews, all that good stuff. It really means a lot to me. My mission with this show is to deliver financial tips and advice. That will be not only educational but inspirational. I want you to take action with what you’re learning from this podcast. Even micro-steps or micro habits that you develop will move you in a positive direction that really adds up over time. I believe that when you don’t know how money works or the exact next steps to take, it can be pretty tough to make good decisions that improve your life and financial wellness. And I think answering questions here on the show is, is a really great tool.

So I’m kicking off each episode with a few of your recent questions. The first one comes from Aaron C who says I own an art gallery. And as the business has grown, I have more cash growing in my business checking account. And wondering if using an interest-bearing account would be a good idea. What guidance do you have for where I should keep my working capital or cash reserve. Aaron, thank you so much for your question, and congratulations on growing your business. Just like you need a personal emergency fund. You also need a healthy cash cushion for your business, just in case revenue dips, or you have unexpected expenses. I’m going to recommend that you look into what’s called a sweep account. This links a business bank account to an investment account. It keeps your bank balance at a preset level by transferring excess funds at the end of each business day as needed.

So how to work is that you specify the minimum balance. You want to keep in your bank account and any amounts over that balance will automatically be swept into a higher interest account, such as a money market account or a mutual fund. And if your bank balance dips below your target balance, the sweep automatically goes in the opposite direction and it moves enough cash from your investments back to your bank account, to get it up to the minimum balance that you require. So the goal with a sweep account is to always maintain a minimum amount of cash to run your business, but still, allow excess to make a higher return for you. This is important because most business checking accounts do not pay any interest and business savings accounts may pay even less than personal savings accounts. So, Erin, I would start by asking your existing bank if they offer a sweep or if they have any recommendations.

And if you have a relationship with a brokerage firm such as Vanguard or fidelity, they may offer a sweep account for you. So contact them about it as well. Just be sure that the fees for having a sweep account are offset by your earnings. All right. I got another question from Shantelle who says I’ve been listening to your podcast for the past two weeks. And one day I even went on a binge and listened to 12 episodes. It’s great stuff. And I recommended you to my daughter, Shantelle. That is incredible. Thank you for bingeing episodes. All right. She says I have about $14,000 in a traditional IRA, but after listening to one of your shows, I realized that I should be investing in a Roth instead. So I won’t have to pay taxes on distributions in retirement. Is it a good idea to convert the traditional IRA to a Roth IRA now and take the tax hit?

I’m 55 years old and have about seven years before I retire. I also have a TSP at work that I max out and I have six months of savings. Shantelle, thank you for your question. And by the way, TSP stands for thrift savings plan and that’s something that’s typically offered when you have a government job. So Shantelle, you didn’t mention your income. So I don’t know if you’re eligible for a Roth IRA, but let’s assume that you are for the sake of this Q and a, I’m not a big fan of doing a Roth conversion, especially when you’re approaching retirement age, instead of using your money to pay tax on a Roth conversion. I would rather see you just open a Roth IRA and begin funding it. Now again, that’s if your income does not make you ineligible, if you do earn too much to qualify for a Roth IRA, you can still use a Roth at work.

So that’s a great option because there is no income limit to use a Roth at work. However, I will say the traditional account at work or the traditional IRA is great. If you need a tax break in the current year, but if you don’t use a Roth, always makes sense. So if you qualify for a Roth IRA, I would get it opened. Now there is a five-year waiting period before you can take distributions of your contributions and earnings that are entirely tax-free. So I would leave your traditional IRA alone. Just let it grow without putting any more money in it. And instead, contribute to a Roth IRA instead, and then also contribute to a Roth at work and max it out as you’ve been doing. I hope that helps. Thank you again to Erin and Shantelle for your questions. Now, I want to turn your attention to something you’ve probably been hearing a lot about in the news lately.

And that’s what our show is about the child tax credit payments. These are going out from the IRS to many American families. In fact, you may have already seen the money show up in your bank account. This podcast will review what the child tax credit is and who qualifies for it. You’ll find out how much you could receive and if it could affect your future tax refund. So let’s start out with a primer on what it is exactly the child tax credit. It’s not new. It’s something that’s been around actually since 1997. However, due to COVID relief known as the American rescue plan of 2021, the credit has changed significantly for a limited period. If you have kids, you’re probably familiar with the child tax credit, but if you’re like me and you don’t have kids, the credit may be news to you. So let’s talk about it.

The child tax credit is a federal benefit for qualifying taxpayers with one or more qualifying dependent children. It puts more money back into the pockets of families by reducing the amount of tax they owe or increasing their tax refunds. Unlike a tax deduction, a tax credit works very differently. It cuts your tax bill on a dollar-for-dollar basis, and that makes it a lot more valuable than a tax deduction. Let me give you an example. Let’s say you owe a thousand dollars in taxes and you qualify for a $250 tax credit that gets cut right off of your tax liability. So you only pay $750 in taxes. So a thousand dollars in taxes minus the $250 credit means you got to pay $750. Now let’s compare that to getting a $1,000 tax deduction instead of a tax credit, a deduction does not reduce the actual dollar for the dollar amount of tax that you owe.

Instead, it reduces the taxable income that you owe tax. So let’s say you qualify for a thousand dollar tax deduction, depending on your average tax rate, it may end up saving you about $200 in taxes, which is much less than the savings you would get for a $1,000 tax credit. So how much can you get from this expanded child tax credit? Well, the money that you can save by claiming it depends on your income and on your family size before the pandemic, it paid qualified taxpayers, $2,000 per child under age 17 legislation boosted the credit to $3,000 per child under age 18, starting in 2020. Additionally, if you have a child under age six, you qualify for a $3,600 credit. And another change that happened in 2021 is that the child tax credit is fully refundable. That means that you receive it, even if the amount exceeds what you owe in taxes.

For example, if you owe a thousand dollars in taxes and qualify for a $3,000 tax credit, the IRS pays you the difference or $2,000. That’s very different from a non-refundable credit, which only allows you to receive a maximum amount that reduces your tax liability to zero. In other words, a non-refundable credit never puts money back in your pocket. It only offsets what you owe the government. And as I mentioned, the child tax credit is now fully refundable, allowing families to take advantage of every penny of the benefit. Additionally, starting in July, 2021 up to 50% of your credit can be paid in advance as monthly payments. Through the end of the year, advanced payments can be up to $300 per month per child under age six and up to $250 for each child, age six through 17. And they have to reach those ages. By the end of the year, by December 31st, 2021, you can also claim a one time credit of $500 for dependent children over age 18.

And that includes full-time college students up to age 24. If you’re looking to refresh your wardrobe, look no further than today’s sponsor thread up. Did you know that thrifting an item instead of buying it reduces its carbon waste and water footprints by 82%. So you save more than just money. You’re also saving the earth, show the planet some love by shopping at the online thrift store thread. Up before I started shopping at thread up, I had some reservations about thrifting online, but with writeup, I find amazing quality clothing in new or like new condition. So there are never any surprises. When these items show up at my door, get the styles you love at a fraction of the price. You’ll look and feel good with thread up and for money girl listeners. Here’s an exclusive offer just for you get an extra 30% off your first order@threadup.com slash money.

That’s T H R E D U p.com/money for 30% off your first order, threat up.com/money for an extra 30% off today terms apply. So, as I mentioned, you may have already received your first child tax credit payment. The first of six advanced payments went out on July 15th, 2021, and they’ll continue getting paid each month. They’re going to go out on August 13th, September 15th, October 15th, November 15th and December 15th. And those payments do not get considered as taxable income because they’re just a benefit that you’re receiving early note that if no legislation gets passed this year, starting next year in 2022, the child tax credit will revert to pre pandemic rules, reducing the credit amount to $2,000 per child and eliminating the monthly advanced payments altogether. However, the American family’s plan is a proposal that would extend the child tax credit through 2025 and maintain its fully refundable status. That’s if Congress enacts it, many of you who qualify for this credit got a notice from the IRS and you know, you’re fully up to speed and aware of it.

But for some families knowing if you qualify for the child tax credit is not so clear, cut. It can be kind of confusing. You must have a primary home in the United States for more than half of the year, or file a joint tax return with a spouse who does have a primary home in the U S at least half of the year. Only one taxpayer can claim the child tax credit per child. Even if that child lives in more than one household during the year, if one parent has primary custody, that parent typically receives the credit. However, if you’re in a joint custody situation, parents have to agree on who will claim the credit one option may be for a different parent to claim it in alternating years. However, since 2021 is paying a higher than normal benefit, it’s probably wise for parents to agree on how to split the funds between themselves in some fair proportion.

And hopefully the increased amount will continue. But again, if it doesn’t, it just may be, uh, an increased benefit for this year. Additionally, families may have other caretakers besides parents, such as siblings, grandparents, aunts, or uncles who may be entitled to the child tax credit and based on their level of financial support for a dependent child to be eligible for the credit, both the taxpayer and the qualifying dependent child must be us citizens, us nationals, or us resident aliens with social security numbers. So if your child does not have a social security number for summaries and you definitely need to apply for one right away, the dependent must have lived with the person claiming the tax credit for more than half of the year, and be claimed as a dependent on their tax return. Also, the child must not have provided more than half of their own financial support during the year.

Now, if you’re not sure if a dependent qualifies you to claim the child tax credit, there’s a very handy tool@irs.gov that you can check out for guidance. And I’ll put a link to that tool in the notes for the show they’re in the money girl section@quickanddirtytips.com. And after checking out that tool, if you’re still not sure about whether you can claim the credit, I would encourage you to speak with a qualified tax accountant for advice. Now, I want you to be aware that not every family qualifies to claim the child tax credit, it was created to give financial help to qualifying low and middle income taxpayers. Therefore, if you earn over an annual threshold, your benefit may be reduced or eliminated. Here are the limits for your modified, adjusted, gross income or match. I am a GI by tax filing status that you’ve got to meet to claim the full child tax credit for 2021.

If you’re a single tax payer, you’ve got to earn $75,000 or less. If you’re a head of household, you must earn $112,500 or less. And if you’re a married couple filing taxes jointly, you must earn $150,000 or less. So let me give you an example. Uh, if you take a family with an annual match, I have $150,000 and three kids ages two, five, and 10, that family would receive total credits of $10,200 for 2021 that breaks down to $3,600 plus $3,600 for the two youngest children who are under age six and then another $3,000 for the oldest child that family would receive half of the credit in advance by receiving payments of $850 per month. So over six months, the advance would total $5,100. And then the remaining half, the remaining $5,100 balance would be paid as a tax by mid April in 2022. Let me give you another example of a single parent with match.

I have $60,000 and an eight year old child. That person would qualify for an advanced payment of $250 per month, starting in July, 2021. For those earning more than the thresholds that I just reviewed. You either qualify for no tax credit or a reduced amount. Again, it’s based on your income and your tax filing status. However, once your modified adjusted gross income exceeds $240,000 as a single taxpayer or double that $440,000 as a married couple, that files jointly that’s at the point where you become ineligible for any amount of credit. So if you qualify for the child tax credit, how do you get it? Well, it’s really critical to make sure the IRS knows how to pay you. And that’s especially important. If you’re someone who doesn’t typically file a tax return because you have low income, remember that you can still get advanced credit payments, even if you have no income, even if you pay no tax, as long as you’re eligible, the fastest way to receive advanced payments is by direct deposit using a bank account, a prepaid debit card, or even a mobile app.

If you received federal stimulus payments in 2020, and you haven’t moved or changed your bank account, you should automatically receive the advanced credit payments if you’re eligible. However, if you did not receive a stimulus payment or you were not required to file taxes for 2020, I want you to be sure that you go to the IRS and you sign up. They have a special signup tool that allows you to inform the government that you are qualified for payments and where to send them again. I’ll put a link to the IRS signup tool in the notes for the show that’s in the money girl section@quickanddirtytips.com. Now, one interesting thing about this credit is that you’ve got the option to opt out of the monthly advanced payments. If you prefer to take the full credit on your tax return instead, underpayments or over-payments of the child tax credit are going to be reconciled when you file taxes next year.

So unenrolling from the advanced payments could prevent you from having an unexpected tax liability next year. However, there is some protection here. If you have income below $40,000 as a single taxpayer or below $60,000 as a married couple filing taxes jointly, there is a cap on how much of the credit you could have to repay. So for most people getting the advanced payments is a very wise financial move. While the advanced payments reduce your tax refund for the year, they may still be higher than your typical refund due to the higher tax credit amount for 2021. But if you choose to opt out of advanced payments, for whatever reason, you can do that@irs.gov, they have a child tax credit update portal where you can say, no, I don’t want the advanced credit payments. Again, there’ll be a link to that in the show notes, along with many other resources to help you understand eligibility for the child tax credit.

I hope this has been helpful to help you understand who’s eligible for the credit and how to get your advanced payments. If you qualify before we go, I want to remind you that I’ve got some fantastic online courses created for you at very, very affordable prices. This is a really great time of the year to evaluate your resolutions. I know many of you made a resolution to get out of debt this year, and I really want to help you do it. Believe it or not. We’re already in the second half of the year, but it’s not too late to get on a better path and make sure that you reach your financial goals. A great way to jumpstart your success is my best-selling online class. It’s called get out of debt fast, a proven plan to stay debt free forever. Take control of your finances by joining this super affordable class, you’ll come away with a clear debt reduction plan to eliminate credit cards, student loans, medical bills, mortgages, or any debt you owe, even if you don’t have extra money to pay them off faster.

And another course to check out if you’re struggling to build credit right now is my online class called build better credit. The ultimate credit score repair guide. It gives you the best 2021 strategies to raise your credit scores. Cut costs that factor your credit and get the financial safety net you deserve. You simply won’t get different results with your money if you don’t take different actions. So I’d love you to check them out and learn more to do that. You can just text the phrase debt course, D E B T C O U R S E with no space or credit course, C R E D I T C O U R S E with no space text, either of those phrases to the number 3, 3, 4, 4, 4. And I’ll send you an email with a huge discount code that you can’t afford to mess. And if you don’t text, you can find all this information at my website, Laura D adams.com. That’s all for now. I’ll talk to you next week until then here’s to living a richer life. Money girl is produced by the audio wizard, Steve Ricky Berg with editorial support from Biana Santura. If you’ve been enjoying the podcast, take a moment to rate.

You’ve probably been hearing a lot about the child tax credit payments that the IRS is sending many American families. You may have already seen the money show up in your bank account.

This episode will review what the child tax credit is and who qualifies for it. You’ll find out how much you could receive and if it could affect your future tax refund.

What Is the Child Tax Credit?

The child tax credit isn’t a new benefit for Americans – it’s been around since 1997. However, due to COVID relief, known as the American Rescue Plan of 2021, the credit has changed significantly for a limited period.

If you have kids, you’re probably familiar with the child tax credit. But if you don’t, the credit may be news to you. So, here’s a primer.

The child tax credit is a federal benefit for qualifying taxpayers with one or more qualifying dependent children. It puts more money back in the pockets of families by reducing the amount of tax they owe or increasing their tax refunds.

Unlike a tax deduction, a tax credit cuts your tax bill on a dollar-for-dollar basis, making it more valuable. For instance, if you owe $1,000 in taxes and qualify for a $250 tax credit, your tax liability gets cut to $750.

Let’s compare that scenario to getting a $1,000 tax deduction. A deduction doesn’t reduce the actual amount of tax owed but instead reduces your taxable income. Let’s say you qualify for a $1,000 tax deduction. Depending on your average tax rate, it may end up saving you about $200 in taxes, which is much less than for a $1,000 tax credit.

How Much is the Child Tax Credit

How much money you could save by claiming the child tax credit depends on your income and family size. Before the pandemic, it paid qualified taxpayers $2,000 per child under age 17.

Legislation boosted the credit to $3,000 per child under age 18, starting in 2020. Additionally, if you have a child under age six, you qualify for a $3,600 credit.

Another change for 2021 is that the child tax credit is fully refundable. That means you receive it even if the amount exceeds what you owe in taxes.

If you’re single with MAGI above $240,000, or a joint filer earning more than $440,000, you become ineligible for the credit.

For example, if you owe $1,000 in taxes and qualify for a $3,000 credit, the IRS pays you the difference, or $2,000. That’s different from a non-refundable credit, which only allows you to receive a maximum amount that reduces your tax liability to $0. In other words, a non-refundable credit never puts money back in your pocket – it only offsets what you owe the government.

As I mentioned, the child tax credit is now fully refundable, allowing families to take advantage of every penny of the benefit. Additionally, starting July 2021, up to 50% of your credit can be paid in advance as monthly payments through the end of the year.

Advance payments can be up to $300 per month per child under age six, and up to $250 for each child age six through 17, by December 31, 2021. You can also claim a one-time credit of $500 for dependent children over age 18, including full-time college students up to age 24.

When Do You Receive Advance Child Tax Credit Payments?

The first of six advance credit payments went out on July 15, 2021. They’ll continue getting paid on August 13, September 15, October 15, November 15, and December 15. The payments don’t get considered taxable income because they’re a tax benefit that you receive early.

Note that if no additional legislation gets passed, starting in 2022, the child tax credit will revert to pre-pandemic rules, reducing the credit amount to $2,000 per child and eliminating monthly advance payments. However, the American Families Plan is a proposal that would extend the child tax credit through 2025 and maintain its fully refundable status if Congress enacts it.

Who Qualifies for the Child Tax Credit?

Knowing if you qualify for the child tax credit is clear-cut for some families but confusing for others. You must have a primary home in the U.S. for more than half the years or file a joint tax return with a spouse who does.

Only one taxpayer can claim the child tax credit per child, even if they live in more than one household during the year. If one parent has primary custody, that parent typically receives the credit.

However, for joint custody arrangements, parents must agree on who will claim the credit. One option may be for a different parent to claim it in alternating years. However, since 2021 pays a higher-than-normal benefit, it may be wise for parents to agree to split the funds between themselves in some fair proportion.

Additionally, families may have other caretakers besides parents, such as siblings, grandparents, aunts, or uncles, who may be entitled to the child tax credit based on their level of financial support for a dependent child.

To be eligible for the credit, both the taxpayer and qualifying dependent child must be U.S. citizens, U.S. nationals, or U.S. resident aliens with Social Security numbers. The dependent must have lived with the person claiming the credit for more than half of the year and be claimed as a dependent on their tax return.

Also, the child must not have provided more than half of their own financial support during the year. If you’re not sure if a dependent qualifies you to claim the child tax credit, there’s a handy tool at IRS.gov to check out for guidance. If you’re still unsure, consider speaking with a qualified tax accountant for advice.

What Are the Child Tax Credit Income Limits?

Be aware that not every family qualifies to claim the child tax credit. It was created to give financial help to qualifying low- and middle-income taxpayers. Therefore, if you earn over an annual threshold, your benefit may be reduced or eliminated.

Here are the limits for modified adjusted gross income (MAGI) by tax filing status you must meet to claim the full child tax credit for 2021:

  • Singles must earn $75,000 or less
  • Heads of household must earn $112,500 or less
  • Married couples filing taxes jointly must earn $150,000 or less

For example, a family with annual MAGI of $150,000 and three children ages 2, 5, and 10 would receive total credits of $10,200 for 2021. That breaks down to $3,600 plus $3,600 for the two youngest children and another $3,000 for the oldest child.

That family would receive half of the credit in advance by receiving payments of $850 per month. Over six months, the advance would total $5,100, and the remaining $5,100 balance would be paid as a tax refund by mid-April in 2022.

Another example is a single parent with MAGI of $60,000 and an 8-year-old. They would qualify for an advance payment of $250 per month starting in July 2021.

For those earning more than the thresholds I just reviewed, you either qualify for no tax credit or a reduced amount, based on your income and tax filing status. Since you’re single with MAGI of $240,000, or a joint filer with $440,000, you become ineligible for the credit.

How Do You Get the Child Tax Credit?

If you qualify for the child tax credit, it’s essential to make sure the IRS knows how to pay you. That’s especially important if you’re someone who doesn’t typically file a tax return because you have a low income. Remember that you can still get advance credit payments even if you have no income if you’re eligible.

The fastest way to receive advance payments is by direct deposit, using a bank account, prepaid debit card, or mobile app. If you received stimulus payments in 2020 and haven’t moved or changed your bank account, you should automatically receive the advance credit payments if you’re eligible.

However, if you didn’t receive a stimulus payment or you weren’t required to file taxes for 2020, be sure to use the IRS signup tool to inform the government that you’re qualified for payments and where to send them.

Can You Opt Out of the Child Tax Credit?

You also have the option to opt out of the monthly advance payments if you prefer to take the full credit on your 2021 tax return instead. Underpayments or overpayments of the child tax credit get reconciled when you file taxes next year, so unenrolling could prevent having an unexpected tax liability.

However, if you have income below $40,000 as a single taxpayer or $60,000 as a married couple filing taxes jointly, there’s a cap on how much of the credit you could have to repay. So, for most people, getting the advance payments is a wise financial move.

While the advance payments reduce your tax refund for the year, they may still be higher than your typical refund due to the higher tax credit amount for 2021. But if you choose to opt-out of advance payments, visit the IRS Child Tax Credit Update Portal.

For more information about eligibility for the child tax credit, check out the following resources at IRS.gov:

This article originally appeared on Quick and Dirty Tips

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About the Author

Laura Adams, Quick and Dirty Tips

Laura Adams, Quick and Dirty Tips

Laura Adams is an award-winning author of multiple books, including Money Girl’s Smart Moves to Grow Rich. Her newest title, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, is an Amazon No. 1 New Release. Laura’s been the writer and host of the popular Money Girl Podcast, a top weekly audio show in Apple Podcasts, since 2008. She’s a frequent source for the national media and has been featured on most major news outlets including NBC, CBS, ABC FOX, Bloomberg, NPR, The New York Times, The Wall Street Journal, The Washington Post, Money, Time, Kiplinger’s, USA Today, U.S News, Huffington Post, Marketplace, Forbes, Fortune, Consumer Reports, MSN, and many other radio, print, and online publications. Millions of readers and listeners benefit from her practical financial advice. Her mission is to empower consumers to live richer lives through her podcasting, speaking, spokesperson, teaching, and advocacy work. Laura received an MBA from the University of Florida. Visit LauraDAdams.com to learn more and connect with her.

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