As part of the American Rescue Plan Act passed in March 2021, changes were made to the Child Tax Credit that could impact millions of families for the 2021 tax year.  While these changes may benefit your family financially, there have been many questions surrounding the changes, including who is eligible, the credit amount, how eligible families will receive their payments, etc.  In this article, we break down some of the changes and what you can expect.

What are the changes?

The most significant changes to the Child Tax Credit (CTC) for 2021 are an increase in the maximum credit allowed per qualifying child and a requirement for the IRS to issue advance payments of a portion of their 2021 CTC to eligible taxpayers starting in July 2021. The increased credit amount is up to $3,600 for each child under six years old or up to $3,000 for each child ages 6-17 (including children that turn 17 during 2021).  Previously, the CTC was limited to a maximum of $2,000 per qualifying child.  The advanced payments to eligible taxpayers will be 50% of their estimated 2021 CTC and distributed monthly throughout the second half of 2021.

Who’s eligible?

Similar to the COVID-19 Stimulus Payments, the amount of your 2021 CTC may be limited based on your adjusted gross income and filing status.  The entire $3,600 or $3,000 CTC per child for 2021 will be available for taxpayers who:

  • File as Married Filing Jointly with adjusted gross income (AGI) up to $150,000
  • File as Head of Household with AGI up to $112,500
  • File as Single with AGI up to $75,000

Higher-income taxpayers will receive a reduced CTC for 2021, depending on their income level.

The IRS has started mailing letters to over 36 million taxpayers, alerting them that they may be eligible to receive advance payments of the CTC based on information available to the IRS.  Eligible families can also expect a second personalized letter from the IRS that will include an estimate of their monthly payments after the initial letter is received. The IRS determined taxpayer’s eligibility based on information from their 2020 tax returns or their 2019 tax returns if 2020 has not been filed yet.

I’m eligible. How do I get my advanced payment?

Since eligibility to receive advance payments of your 2021 CTC is based on your 2019 or 2020 tax return information, most families do not have to do anything to receive their advance payments. According to the IRS, roughly 80% of families will receive their payments via direct deposit, with the remaining families receiving paper checks or debit cards. Monthly payments will be up to $300 per child under six or up to $250 per child age 6-17, subject to the phaseouts outlined above.

The monthly payments will start on July 15th and continue on the 15th of each month through December 2021, totaling 50% of your estimated 2021 CTC.  The remaining portion of your 2021 CTC will be claimed on your 2021 tax return, including a reconciliation of the advanced payments you received compared to the total CTC you were entitled to based on your 2021 AGI.  Any amount of your 2021 CTC that you are entitled to that was not received in advance payments will be refunded when you file your 2021 tax return.

Will I have to pay back the advanced payments?

With the advanced 2021 CTC payments based on your 2020 or 2019 tax return information, you might receive more in advanced payments than you are entitled to based on your current information for 2021.  For example, suppose your 2020 tax return indicates information that is not current for 2021, including your income level, marital status, or the number of qualifying children. In that case, you may receive an incorrect amount for your 2021 CTC advanced payments. The amount you were overpaid may be required to be paid back when you file your 2021 tax return based on your income level.

How do I update my qualifying information or opt-out of the payments?

As part of the American Rescue Plan Act, the IRS is required to create an online portal that taxpayers can use to update any information that has changed during 2021 since their 2020 or 2019 tax return was filed (i.e., had a new baby, income level changed, etc.).  This portal will allow you to update the number of qualifying children, marital status, significant income changes, and any other information for 2021 that the IRS needs to adjust your advance CTC payments.  In addition, the portal will allow you to opt- out of receiving any advanced payments of your 2021 CTC and instead claim the credit on your 2021 tax return. The IRS is required to have the portal launched and available for use by July 1st, ahead of the first advanced payment on July 15th.

Do you still have questions?  Our team is here to help!