What You Need to Know

Millions of American taxpayers with children will begin receiving advance payments of their 2021 Child Tax Credits starting this July. However, not all households that qualify for the Child Tax Credit will receive the advance payments, as there are income-based phaseout rules.

The advance payments were created by the American Rescue Plan (ARPA) enacted in March 2021 and are intended to ease the financial burdens of families still struggling with the economic fallout from the Covid-19 pandemic.

Child Tax Credit Background

 The Child Tax Credit (CTC) was created in 1997 as a $500 nonrefundable credit to provide tax relief to middle-income taxpayers and was boosted to $1,000 and made partially refundable in 2001. The CTC was doubled to $2,000 by the Tax Cuts and Jobs Act of 2017 and expanded to families with higher incomes – up to $400,000 for married joint filers – though it remained only partially refundable.

Earlier this year The American Rescue Plan Act enhanced the CTC to $3,000 for each child from ages 6 to 17, and $3,600 for children under 6, and made the credit fully refundable. The ARPA also raised the age of eligibility for the CTC by one year. These changes are effective for the 2021 tax year only.

Most notably, the ARPA legislation also created the Advance Child Tax Credit payments that will start in July.

Eligibility for Advance CTC Payments

Generally, taxpayers who meet income qualifications and who have children who will be aged 17 or under at the end of 2021 will receive the advance payments.

Advance payments will be made to households with 2020 adjusted gross income (AGI) of up to $150,000 for married filing jointly, up to $112,500 for the head of household filers, or up to $75,000 for single filers.

The payments will be made monthly by the U.S. Treasury Department from July through December 2021 and will total 50% of the amount of the 2021 Child Tax Credit that the government believes you are entitled to. If you receive these advance payments, you will be able to claim the remaining 50% of the credit when you file your federal income tax returns for 2021 next year.

If you don’t qualify for the advance payments, you may still take the full Child Tax Credit when you file your income tax returns next year.

The CTC Rules

 It’s important to remember the advance payments are for the anticipated Child Tax Credit that taxpayers will qualify for on their 2021 tax returns. The IRS is basing its eligibility information on 2020 tax returns and is factoring in the process of aging out. So, taxpayers who have children turning 18 this year will not qualify to receive the CTC for those children, but they will receive it for younger children.

If you showed children on your 2020 tax return who will qualify for the CTC in 2021, and you qualify on the basis of your 2020 adjusted gross income (AGI), you do not need to take any action to receive the advance payments; the Treasury Department will automatically send you these payments if your 2020 AGI falls into the qualifying range.

All children for whom the credit is claimed must have a Social Security number or a Taxpayer Identification Number.

Should You Opt-Out?

 An IRS web portal will be launched by July 1 that will allow taxpayers to opt-out of the advance CTC payments. Why would you want to do this?

If your income is expected to increase beyond the advance payment eligibility range for 2021 and you receive the advance payments based on your 2020 AGI, you must return the money to the government. To avoid having to make this kind of payback, you may opt-out of the advance payments by notifying the IRS through the web portal.

Conversely, if your 2020 income was above the qualifying range but is expected to drop in 2021, or if you have added a child to the household this year – both of which are events that would qualify you for the advance payments – you can notify the IRS through the web portal.

How the Advance CTC Payments Work

 If a family has four children, including 4-year-old twins and two older children ages 7 and 9, their 2021 Child Tax Credit would total:

  • $7,200 ($3,600 each for the twins)
  • $6,000 ($3,000 each for the older children)
  • $13,200 (total)

The advance payments would total $6,600 (50% of the total CTC), payable in six monthly installments of $1,100 each. This family would be able to claim the remaining 50% of the CTC next year when they file their income tax returns. Since the credit is fully refundable, a taxpayer whose tax liability is less than the total credit will receive the balance as a tax refund.

To determine how much your family can receive from the Child Tax Credit, click here for a calculator.

Income Phaseout Rules

For 2021, the CTC generally is reduced by $50 for each $1,000 (or fraction thereof) of adjusted gross income over:

  • $150,000 for a joint return or a surviving spouse,
  • $112,500 for a head of household, or
  • $75,000 for any other taxpayer, such as unmarried taxpayers and married taxpayers who file separately.

This reduction in the credit amount is itself limited to the lesser of:

  • The increased credit amount (that is, $1,000 for each qualifying child ($1,600 for a child under 6); or
  • 5% of the applicable phase-out range.

It’s Complicated

 The numbers and the structure of the Advance CTC payments are confusing. What is important to remember is that the CTC is still available to all taxpayers who:

  • Have children under age 18;
  • Show AGI of up to $400,000 (married filing jointly) or $200,000 (other taxpayers).

The additional benefit – advance payments – has been added for households with AGI below $150,000 (married filing jointly), $112,500 (head of household, or $75,000 (single filers and married filing separately). If you have questions about the Child Tax Credit or the advance payments, please contact us.

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