IRS to Begin Advance Child Tax Credit Payments July 15

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Tax Advisory: U.S. Federal

On July 15, millions of eligible families across the US will receive their first advanced payment for the expanded Child Tax Credit. For 2021 only, the IRS will send families half of their 2021 Child Tax Credit as automatic monthly payments from July through December. The remaining half of the credit will be applied when 2021 taxes are filed as a refundable credit.    

The amount of the credit and the age limit have also increased:

  • For children under the age of six, the credit is up to $3,600
  • For children six and older, the credit is up to $3,000
  • Age limit raised from 16 to 17

Taxpayers generally won’t need to do anything to receive the advance payments since the IRS will use the information it has on file for 2019 and 2020 taxes. Payments will be made via direct deposit for those who received direct deposit tax refunds. For all others, payment will be via paper check or debit card received in the mail. 

Who is eligible for the Child Tax Credit?

To qualify for the Child Tax Credit and the automatic advance monthly payments, you (and your spouse if you file a joint tax return) must have all of the following:

  • Filed a 2019 or 2020 tax return claiming the Child Tax Credit, or given the IRS your information using the non-filer tool.
  • A main home in the U.S. for more than half the year, or filed a joint return with a spouse who has a main home in the U.S. for more than half the year.
  • A qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number.
  • Income less than certain limits – see details below.

Low income families who didn’t make enough and weren’t required to file 2019 or 2020 taxes still qualify to receive this crucial tax relief, but will need to take the additional step of registering using the Non-Filer Sign-Up Tool

 

How much will I receive in Child Tax Credit payments? 

The Child Tax Credit advance payments are based on several factors, including the age of your children and your income.

 

AGE

Age Full Amount of Child Tax Credit
Ages 5 and younger   Up to $3,600 each child, with half of credit as $300 monthly payments
Ages 6 to 17 Up to $3,000 each child, with half of credit as $250 monthly payments
Age 18 $500 one-time check in 2022
Ages 19 to 24, full-time college students $500 one-time check in 2022

 

INCOME

The credit is subject to a two-part modified adjusted gross income phase-out for 2021, the base $2,000 credit and the additional 2021 amount.

The base credit of $2,000 ($166 per month) per qualifying child is gradually phased-out for joint filers with adjusted gross income of $400,000 or more. For single and head-of-household filers, the phase-out begins at $200,000.  

For the portion of the credit exceeding $2,000 (the additional 2021 amount), this is gradually phased-out at the following adjusted gross income levels:

  • Married filing joint $150,000
  • Head-of-household $112,500
  • Single $75,000

If your AGI is above these thresholds, the credit phases out by $50 for every $1,000 of income over the threshold.

If your AGI is less than than the amounts specified above, you’ll receive the full amount of the credit based on the age of your qualifying child. 

 

Can you show me an example of how the Child Tax Credit works?  

Here’s an example from the White House’s new informational website on the Child Tax Credit: 

Sam & Lee are a married couple making $100,000 a year. They filed a joint 2020 tax return and they have two children under the age of 6. Because they claimed 2 children on their 2020 tax return, they will receive part of their payment now, and will then claim the other half when they file their 2021 income tax return.

Here’s what Sam & Lee will receive and when:

  • The total Child Tax Credit amount will be $7,200 ($3,600 credit for each child under age 6).
  • They will receive half, or $3,600, in 6 monthly installments of $600 each starting in July and continuing each month through December 2021.
  • They’ll receive the remaining $3,600 as a refundable credit when they file their 2021 tax return.

 

What do I need to know about the new IRS online portals and tools? 

The IRS has three online resources designed to help families navigate the advance monthly payments:

  1. Child Tax Credit Eligibility Assistant 
    Allows families to answer a series of questions to quickly determine whether they qualify for the advance credit. This is not a registration tool, merely a tool to help determine eligibility. 
  2. Child Tax Credit Update Portal
    Allows families to verify their eligibility for the payments and, if they choose, to unenroll, or opt-out of monthly payments to instead receive a lump sum credit when they file their 2021 tax return. This secure, password-protected tool is available to any eligible family with internet access and a smart phone or computer. Additional features planned for this summer and fall include the ability to: 
    • view payment history
    • edit bank account information or mailing addresses
    • update family status or child custody status
    • update changes in income
  3. Non-Filer Sign-Up Tool
    Helps families not normally required to file an income tax return to quickly register for the Child Tax Credit.

Why would someone want to unenroll or opt-out of the advance payments? 

If you receive advanced payments, but then end up not qualifying for the credit at the end of 2021, or even qualifying for a reduced credit, the excess advance received will need to be paid back with the 2021 tax filing. Why would this occur?  Any number of reasons, income could end up being too high in 2021, perhaps your main home was outside the U.S. for more than half of 2021, or maybe an ex-spouse or other family member ends up qualifying to claim the credit instead due to dependent status for 2021. 

It is important to use the Child Tax Credit Update Portal to notify the IRS about any changes in your situation, so you can ensure you receive the correct Child Tax Credit amount. 

 

Why is it important to consult with my Tax Advisor if I have questions?

Though these tax changes are temporary and only apply to the 2021 tax year, they may present important cash flow and financial planning opportunities today. It is also important to note that the monthly advance of the Child Tax Credit is a significant change. The credit is normally part of your income tax return, and the choice to have the Child Tax Credit advanced will affect your refund or amount due when you file your return. 

Your tax advisor can help you determine how much credit you may be entitled to and whether advance payments are appropriate. As always, planning ahead can help you maximize your family’s financial situation and position you for greater success. Please contact your Tax Advisor to discuss your specific situation. 

 

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