The American Rescue Plan had more benefits for taxpayers than just the 3rd stimulus payment. The plan that was signed on March 11, 2021 includes an update to the Child Tax Credit. We are here to break down everything you need to know about this credit, the updates that were made, and if they apply to you.
What is the child tax credit?
A tax credit for parents of dependent children.
How much is the child tax credit worth?
In Tax Year 2020, the child tax credit is worth $2,000 for eligible dependents under the age of 17 at the end of the year. The credit is partially refundable and begins to phase out with AGI over $200,000 ($400,000 if married filing jointly).
In Tax Year 2021, the child tax credit is 100% refundable and increased to $3,000 for eligible dependents age 6 to 17 and $3,600 for eligible dependents under age 6. The increased credit of $1,000 or $1,600 begins to phase out for individuals with AGI over $75,000, $150,000 (if filing jointly) and $112,500 for head of household filers. The original $2,000 credit per eligible dependent does not begin to phase out until AGI exceeds $200,000 ($400,000 if filing jointly). Eligible dependents must be related to you, live with you for 6 months or more, and be a U.S. citizen, U.S nationals, or U.S. resident aliens.
Example: Married couple with $80K AGI and a 10-year-old dependent would receive a child tax credit of $3,000 for 2021.
Will I get this credit if I don’t owe taxes?
Prior to the passage of the new law, the child tax credit was both nonrefundable and refundable, depending on if the credit amount exceeded taxes owed. For Tax Year 2021, the $2,500 earned income threshold was removed. So, even if you do not owe taxes or haven’t earned any income you can still receive this ‘refundable’ credit entirely, similar to receiving a stimulus check.
How long is this ‘expanded’ child tax credit good for?
Currently, the child tax credit increase only applies to Tax Year 2021. It will revert to 2020 amounts for Tax Year 2022, unless a new bill is passed to extend the enhanced credit.
What is the advanced payment being discussed?
It was instructed in the law that the payment can be claimed on a monthly basis in advance of filing a tax return. The IRS will make monthly payments from July 2021 through December 2021 amounting to ½ of the child tax credit, and the remaining half will be realized when claimed in the spring of 2022 when the taxpayer files the 2021 tax return.
Example: A taxpayer who qualifies for the $3,000 child tax credit on their 2021 tax return, could receive $1,500 of it through monthly payments ($250/month) and claim the other $1,500 on their tax return.
How do I qualify for advance Child Tax Credit payments?
You qualify for advance Child Tax Credit payments if you have a qualifying child. Also, you — or your spouse, if married filing a joint return — must have your main home in one of the 50 states or the District of Columbia for more than half the year. Your main home can be any location where you regularly live. Your main home may be your house, apartment, mobile home, shelter, temporary lodging, or other location and doesn’t need to be the same physical location throughout the taxable year. You don’t need a permanent address to get these payments. If you are temporarily away from your main home because of illness, education, business, vacation, or military service, you are generally treated as living in your main home.
How does a taxpayer sign up for monthly payments?
Currently, the plan is to have all qualified parents automatically opted-in for the advanced monthly payments. The taxpayer would then use a newly created IRS portal to either opt-out or make adjustments to the credit amount based on life events (i.e. have a child in 2021).
How do I opt out of the child tax credit?
To access the Child Tax Credit Update Portal, a person must first verify their identity. If a person has an existing IRS username or an ID.me account with a verified identity, they can use those accounts to easily sign in. People without an existing account will be asked to verify their identity with a form of photo identification using ID.me, a third party trusted by the IRS. Identity verification is an important safeguard and will protect your account from identity theft. Unenrolling applies to a single individual only. If you are married filing jointly, your spouse will also need to unenroll. If you don’t unenroll, you will get half of the joint payment you were supposed to receive with your spouse.
Why would I want to opt out of the child tax credit?
Instead of receiving these advance payments, some families may prefer to wait until the end of the year and receive the entire credit as a refund when they file their 2021 return. In this first release of the tool, the Child Tax Credit Update Portal enables these families to quickly and easily unenroll from receiving monthly payments.
The unenroll feature can also be helpful to any family that no longer qualifies for the Child Tax Credit or believes they will not qualify when they file their 2021 return. This could happen if, for example:
- Their income in 2021 is too high to qualify them for the credit
- Someone else (an ex-spouse or another family member, for example) qualifies to claim their child or children as dependents in 2021
- Their main home was outside of the United States for more than half of 2021
Unenrolling is also beneficial if you do not want to change your withholding. Because half of the credit will be paid out in advanced payments, it will only leave $1500 or $1800 per child as a credit on your tax return to offset taxes, which is less than the normal $2000 per child credit. You still receive more dollars in your pocket over the year, but the end result on the tax return would mean you could end up in a position where you go from a refund to owing taxes. For example, if you have 3 children, ages 10, 4 and 2. You would normally receive $6000 in child tax credits. This year, your total child tax credit would be calculated at $10,200. However, $5,100 of this credit will be paid in advance so only $5100 would be left to show on the tax return. If you have your withholding set so that you are going to break even come tax time based on your normal $6000 child tax credit, you would now owe $900 to the IRS.
What is the deadline to unenroll from the Child Tax Credit?
To stop advance payments, you must unenroll 3 days before the first Thursday of the next month by 11:59 p.m. Eastern Time. It may take up to seven calendar days. Check back after unenrolling to make sure your request was processed successfully. You cannot re-enroll at this time. Unenrollment is a one-time action. You will be able to re-enroll starting in late September 2021.
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Will the IRS notify me about the advance Child Tax Credit payments before they are dispersed?
Yes. In June, the IRS will send you Letter 6417. This letter will inform you of the amount of your estimated Child Tax Credit monthly payments. This letter will also indicate where you can find additional information about advance Child Tax Credit payments.
Are advance Child Tax Credit payments taxable?
No. Advance Child Tax Credit payments are not income and will not be reported as income on your 2021 tax return. Advance Child Tax Credit payments are advance payments of your tax year 2021 Child Tax Credit.
However, the total amount of advance Child Tax Credit payments that you receive during 2021 is based on the IRS’s estimate of your 2021 Child Tax Credit. If the total is greater than the Child Tax Credit amount that you are allowed to claim on your 2021 tax return, you may have to repay the excess amount on your 2021 tax return during the 2022 tax filing season. For example, if you receive advance Child Tax Credit payments for two qualifying children properly claimed on your 2020 tax return, but you no longer have qualifying children in 2021, the advance Child Tax Credit payments that you received based on those children are added to your 2021 income tax unless you qualify for repayment protection.
For more questions about the Child Tax Credit and the Advance Child Tax Credit Payments
Please see the IRS website for more information.
Useful Tools to Manage and Monitor the Advance Monthly Child Tax Credit Payments
- Child Tax Credit Eligibility Assistant: allows families to answer a series of questions to quickly determine whether they qualify for the advance credit
- Child Tax Credit Update Portal: allows families to verify their eligibility for the payments and, if they choose to, unenroll or opt out from receiving the monthly payments
- Child Tax Credit Non-filer Sign-up Tool: allows eligible individuals who don’t normally file an income tax return register for payments
More features coming to the Child Tax Credit portal soon
Coming soon, families will be able to use the Child Tax Credit Update Portal to check the status of their payments. In late June, people will be able to update their bank account information for payments starting in August. In early August, a feature is planned that will allow people to update their mailing address. Later this summer and fall, individuals will be able to use this tool for things like updating family status and changes in income.