The Advance Child Tax Credit Payments: What You Should Know, Things To Consider
June 15, 2021
by Jenni MIller, EA & Michele Abel, EA
If you are potentially eligible to receive the Child Tax Credit (CTC), you may have already received an IRS letter detailing the new child tax credit. The following contains additional information:
There have been important changes to the CTC. The American Rescue Plan Act (ARPA) of 2021 expands the CTC for tax year 2021 only.
For 2021, families claiming the CTC will receive up to $3,000 per qualifying child between the ages of 6 and 17 and $3,600 per qualifying child under age 6 at the end of 2021. Under the prior law, the amount of the CTC was up to $2,000 per qualifying child under the age of 17 at the end of the year, meaning children age 17 were not previously eligible. In addition, the entire credit is fully refundable for 2021. This means that eligible families can get it, even if they owe no federal income tax. Before this year, the refundable portion was limited to $1,400 per child.
The increased amounts are reduced (phased out), for incomes over $150,000 for married taxpayers filing a joint return and qualifying widows or widowers, $112,500 for heads of household, and $75,000 for all other taxpayers.
The IRS will issue advance Child Tax Credit payments on July 15, August 13, September 15, October 15, November 15 and December 15 to eligible taxpayers who have a main home in the United States for more than half the year. The total of the advance payments will be up to 50 percent of the Child Tax Credit. Advance payments will be estimated from information included in eligible taxpayers' 2020 tax returns (or their 2019 returns if the 2020 returns are not filed and processed yet).
The IRS urges people with children to file their 2020 tax returns as soon as possible to make sure they're eligible for the appropriate amount of the CTC. Filing electronically with direct deposit also can speed up refunds and future advance CTC payments. For families in which the IRS does not have direct deposit on file, the IRS will mail out payments in the form of a check or debit card. Eligible taxpayers do not need to take any action now other than to file their 2020 tax return if they have not done so. The IRS will issue more information for families who are otherwise not required to file a tax return.
Eligible taxpayers who do not want to receive advance payment of the 2021 CTC will have the opportunity to decline receiving advance payments. Taxpayers will also have the opportunity to update information about changes in their income, filing status or the number of qualifying children. The interactive CTC eligibility tool and the CTC Update Portal are expected to launch by July 1st and will be available through the IRS.GOV website.
Why would taxpayers opt out of receiving the advance CTC payments? Some taxpayers may have to pay back a portion of the advanced funds at tax time, resulting in less of a refund or tax due. Reasons this may happen include changes in income, marital status, or the number of qualifying children. It is important to review your 2020 tax return information and report any changes for 2021 through the IRS CTC portal if you plan to take the advanced payments.
A common scenario that may trigger some taxpayers to pay back the CTC is one involving parents who share custody and alternate the years in which they claim the children on their returns. Since the IRS is relying on 2020 data, the parent who claimed the child in 2020 would receive the advanced CTC, even though they aren’t eligible to receive it in 2021 due to their arrangement. This would result in said taxpayers having to pay that money back.
Even if your situation has not changed, keep in mind that you are receiving 50% of the total amount of CTC you will be eligible for in advance, not just the additional amount above to standard $2,000 per child. For example, let’s say you have 3 kids over age 6. Assuming you are under all of the income thresholds and would receive the full amount for 2021, you would receive $3,000 per child for a total CTC of $9,000. This means you would receive $4,500 in advanced spread out over 6 months and the other $4,500 at tax time. By comparison, in 2020 you would have received $6,000 in CTC at tax time. This means a large number of taxpayers will receive less of a refund at tax time or potentially owe money when they normally don’t. Overall, you are receiving more money, but it’s something to keep in mind so you aren’t surprised when you file if you plan to take the advanced payments.
Also keep in mind, the law requires the IRS to mail out a notice by January 31, 2022 showing the total amount of payments made to taxpayers in 2021. Please keep this document for your records and include it with your tax documents when you have your return prepared. Advanced payments with need to be reconciled on your tax return, much the same way stimulus payments needed to be this year. If this year has taught us anything, incorrect reporting of advanced payments will likely delay your refund for weeks or months.
Our general recommendation is that unless you receive a large refund every year, you should opt out of receiving advanced payments. If you have questions regarding your unique situation, you should consult your tax preparer.