Advance Child Tax Credit Payments in the Works
One of the provisions passed by the American Rescue Plan Act (ARP) becoming law in March with widespread implications is the significant, albeit temporary, increase in the amount of the Child Tax Credit for 2021.
Prior to 2021, the child tax credit was $2,000 per child under the age of 17 who is a US citizen, national or resident alien, could be claimed as a dependent on your return, is related to you and in general, lived with you for at least six months during the year.
The $2,000 credit phases out if your adjusted gross income (AGI) is above $400,000 on a joint return, or over $200,000 on a single or head-of-household return. Once you reach the $400,000 or $200,000 AGI threshold, the credit amount is reduced by $50 for each $1,000 (or fraction thereof) of AGI over the threshold amount.
Further, up to $1,400 of the child credit was refundable for some lower-income individuals with children, but only if they had at least $2,500 of earned income. Refundable tax credits are those that will generate a tax refund, even if no tax has been paid to the government by the taxpayer in the first place.
For 2021, the child tax credit for many is more generous. The ARP increased the credit to $3,000 per child, or $3,600 if the child is under age 6. Further, 17-year-olds now qualify as well. Not only that, but the credit is fully refundable for 2021, and there is no $2,500 earned income requirement to receive the refund.
Here is where it gets interesting. Not all families will qualify for the enhanced credit. In fact, fewer will qualify than the regular child tax credit. This is because the enhanced credit begins to phase out at AGIs of $75,000 on single returns, $112,500 on head-of-household returns and $150,000 on joint returns. Again, the amount of the credit is reduced by $50 for each $1,000 (or fraction thereof) of AGI over the threshold amount. However, this phaseout is limited to the $1,000 (or $1,600) temporary increased credit for 2021 and not to the original $2,000 credit, which still applies under the old rules. Tired yet?
The ARP also requires the IRS to pay out half of the credit in advance by making payments beginning in July 2021 and continuing through December 2021. What could go wrong, right? After all, the IRS has been so successful at sending out economic stimulus payments lately, and doing so only to those that qualify! But I digress…
The IRS recently announced that the advance payments will begin on July 15, 2021 and continue the 15th of each month through December unless the 15th falls on a weekend or holiday. Eligibility for the advance payments will be determined from information contained on a taxpayer's 2020 tax return, or if 2020 hasn't yet been filed, then based on their 2019 return.
But what about people who are not required to file a tax return at all, or whose circumstances have changed since the filing of their last return?
For those reasons, the IRS has said by July 1 it will open up two portals online. One portal will be for people who normally don't have to file a tax return. This will allow non-filers to provide their information so they can receive payments. The second portal is for those who need to update their information for changed life circumstances, such as the birth of a new child in 2021 who, of course, wouldn't be reflected on their 2020 tax return.
Some taxpayers may wish to opt out of receiving the advance payments. These portals will allow those that wish to opt out of the monthly payments, and instead receive one big payout when they file their 2021 taxes in 2022.
As with the previous rounds of economic stimulus payments, the child credit advance payments will be issued via direct deposit to those for whom the IRS has bank account information. Otherwise, they will be paid by paper check or debit cards sent in the mail.
The rules for this program are complex, and mistakes undoubtedly will be made. Patience will be the order of the day for many, no doubt. There is also already talk of attempting to make this temporary enhanced credit into a permanent one. If you want to try to get an idea of what amount you may be receiving, numerous 2021 Child Tax Credit calculators are available online.
