As part of the American Rescue Plan Act of 2021, the IRS has expanded the Child Tax Credit. This is good news if you have kids and earn below $150,000 for married couples.
This expansion is for the 2021 tax year only and will increase the child tax credit amount for many taxpayers, include advance monthly payments of the credit, make the credit fully refundable, and allow the inclusion of children who turn 17 in 2021. The increased amounts are reduced (phased out) for single taxpayers with incomes over $75,000 ($150,000 for married filing jointly).
Below are some common questions about the expanded Child Tax Credit. Keep in mind that the IRS is still in the process of setting these up and more clarifications will be coming out in the future.
- When will the payments start?
The IRS will start sending out the advance monthly payments of the Child Tax Credit on approximately July 15. The monthly payments are expected to be made on the 15th of each month unless the 15th is a weekend or holiday.
- How will the advance monthly payments work?
Previously the Child Tax Credit was a maximum of $2,000 per qualifying child age 16 and under. The expanded Child Tax Credit increased the maximum credit to $3,600 for qualifying children under age 6 and up to $3,000 per qualifying child between ages 6 and 17. The total of the advanced payments will be up to 50% of the expanded Child Tax Credit with a maximum monthly payment of up to $300 per month per child under 6 (up to $250 per month per child between 6 and 17).
The amounts will be estimated from taxpayers’ 2020 tax returns (or 2019 tax returns if the 2020 return has not been filed and processed yet). The IRS will use the same number of children and income reported on the 2020 (or 2019) return and will account for the passage of time in determining the age of the children in 2021 when figuring the credit. Taxpayers will receive their remaining eligible Child Tax Credit amount when they file their 2021 taxes.
Example: A married couple reporting a combined income of $120,000 with a 19-year old child, 8-year old child, and 5-year old child in 2021 would receive a payment of $550 per month ($250 for the 8-year old and $300 for the 5-year old) from July through December, for a total of $3,300. This is 50% of the total child tax credit. They would then claim the additional $3,300 in child tax credits when they file their 2021 tax return.
- How will the payments be sent?
The monthly payments will be sent out by direct deposit if the IRS has your bank information on your 2020 or 2019 return or by paper checks or debit cards if the IRS does not have your bank information. Most taxpayers will not have to take any action to get these payments, other than file their 2019/2020 tax returns if they have not done so.
- What if I need to update my 2021 information or I do not want to receive advance payments of the 2021 Child Tax Credit?
The IRS has provided an online Child Tax Credit Update Portal for taxpayers who wish to check if they’re enrolled to receive payments, unenroll to stop getting advance payments, and provide/update your bank account information for monthly payments (starting with the August payment). They will also be adding additional features to this tool later in the summer that will allow you to make changes to your address, dependents, marital status, and income and also allow you to re-enroll in the payments if you previously unenrolled.
If you are married filing jointly and want to unenroll in the payments, both you and your spouse must unenroll using the portal. If only one spouse unenrolls, the other spouse will still receive half of the payment you were supposed to receive.
- I claimed a child on my 2020 tax return but will not claim them on my 2021 tax return. What should I do?
The IRS is sending payments out based on your 2020 eligibility. If you would not be eligible for the child care credit when you file your 2021 return, the payments will need to be paid back on your 2021 return. It would be best to opt out and unenroll in the payments using the Child Tax Credit Update Portal.
- My income for 2021 will be significantly different from the income shown on my 2020 tax return. What should I do?
The IRS will start phasing out the Child Tax Credit if your 2021 income is above $150,000 ($75,000 for single taxpayers). If your 2021 income will be above that amount, it may be best to opt out and unenroll from the payments using the Child Tax Credit Update Portal. Any payments you receive that you are not eligible for when you file your 2021 return will need to be paid back on your 2021 return. If your income turns out to be less and below the $150,000 ($75,000 for single taxpayers) threshold, you will receive the full amount of the Child Tax Credit you are eligible for, including what would have been sent as advance payments, on your 2021 return.
If your 2020 income was above $150,000 ($75,000 for single taxpayers) but your 2021 income will be below, you will be able to update the IRS and enroll in the advance payments using the Child Tax Credit Update Portal. The IRS will be adding this feature to the portal later this summer. If you do not enroll and are eligible, you will receive the full amount of the Child Tax Credit you are eligible for, including what would have been sent as advance payments, on your 2021 return.
- Do I have to pay taxes on the payments I receive?
You do not have to pay taxes on the payments received. The monthly payments are an advance of your 2021 credit, so they are not taxable. The IRS will be mailing out a notice in January 2022 showing the total amount of payments you received to include on your 2021 return when calculating your remaining Child Tax Credit eligibility. Save this notice or keep track of the total amount of payments you have received.
- Where can I find out more information about the 2021 Child Tax Credit and Advance Child Tax Credit Payments?
The IRS has created this FAQ for taxpayers that provides more information and answers other frequently asked questions.