tax tips — June 17, 2021

How Do the Advance Payments of the Child Tax Credit Work?

by Katie Minion

A little girl playing with a bubble

One of Joe Biden’s first initiatives as President was to help alleviate the economic pressures of the coronavirus pandemic. He signed the American Rescue Plan of 2021 (“ARP Act”) on March 11, 2021, which provided financial and economic support to taxpayers in the form of tax credits, stimulus payments, low-interest loans, and funding for state and local governmental programs.

One notable aspect of the legislation was the expansion of the Child Tax Credit (CTC). The ARP Act temporarily increased the credit, expanded eligibility, and made the credit fully refundable. It also allows you to claim your credits early. But to get these advance payments, there are a few things you’ll need to do.

The 2021 Child Tax Credit is now fully refundable

The CTC has been around for years, but it has historically been only partially refundable. This means that if your tax liability was less than the full credit amount, only a portion of the credit – up to 70%— would be refunded to you. The ARP Act made the CTC fully refundable in 2021, so now the entire credit amount could boost your refund even if you don’t owe any tax (and if you qualify for certain income limits).

The Child Tax Credit is now also available via advance payments

Typically, you claim tax credits when you file your annual tax return, but in 2021, you can have access to the CTC before you file your return. Half of the tax credit is eligible to be paid out in advance as monthly payments from July through December 2021, and the remainder can be claimed when you file your tax return in early 2022.

Eligibility for the Child Tax Credit has become more inclusive, and amounts have increased—but just for 2021

In 2021 only, the child tax credit also changed in the following ways:

  • Dependent children under age 18 are considered qualifying children. In 2020, the cutoff was at age 17.
  • Families can receive up to $3,000 per qualifying child between the ages of six and 17 (up from $2,000 in 2020), and $3,600 for each child younger than six.
  • The child tax credit is phased out for high earners, which means if you earn too much, you’ll lose your credit. The amount of the credit that represents an increase from 2020 (i.e., between $1,000 and $1,600) begins to phase out once a taxpayer’s adjusted gross income (“AGI”) reaches $75,000 ($150,000 for married taxpayers). The original $2,000 credit begins to phase out once a taxpayer’s AGI reaches $200,000 ($400,000 for married taxpayers).

These changes are only applicable in 2021. Unless additional legislation is introduced, the child tax credit will revert to old rules in 2022.

How do I claim the advance credit for the Child Tax Credit?

The advance payments of the credit will go out to most taxpayers automatically. The IRS will look to your 2020 tax returns to estimate what your 2021 child tax credit will be, and they will begin sending payments (either via direct deposit or paper check) beginning July 15th, 2021. The remaining five payments will be initiated on the 15th of each month that follows through the end of the year.

The IRS has an online portal that you can visit to confirm your income, your marital status, and the number of qualifying children you’ll have in 2021. The online portal also allows you to opt out of the advance payments if you’d prefer to receive the credit as a lump sum when you file your 2021 return.

How much are the Child Tax Credit advance payments worth?

Taxpayers who are eligible for the full credit can expect each check to be between $250 and $300 per child (depending on their age). Below is a sample calculation that shows how the IRS would determine a monthly payment for an individual with one qualifying child.

2021 child tax credit for one qualifying child $3,000
Half of the credit to be paid out as advance monthly payments x 50%
  $1,500
Divided by 6 months  ÷ 6
Credit paid each month beginning July 2021 $250

Can I still get the Child Tax Credit if I don’t have to file a tax return?

Individuals who are not required to file tax returns can also receive the credit, but before the IRS can initiate payments to non-filers, they need to collect some information. You can provide this information now at the IRS page for the advance CTC payments.

How should I report the Child Tax Credit when I file in 2022?

The IRS will reconcile your credit with the payments you already received when you file your 2021 tax return. Because your advance payments will be based off your 2020 tax return, it’s important you let the IRS know if your 2021 tax return will look significantly different. If you had another child, got a raise, or got divorced, you’ll want the IRS to know so they can adjust the amount of your monthly advance payments. You will be able to inform them of these changes once their online portal is up and running.

What if the IRS sends me more of the Child Tax Credit than I’m eligible for?

If your advance payments are more than you were eligible for, you may be required to return those funds to the IRS. Fortunately, lawmakers included a safe harbor in the legislation that allows taxpayers who make below a certain amount to keep overpayments. This safe harbor applies when single taxpayers have modified AGIs below $40,000 or when married taxpayers have modified AGIs below $60,000.

How will the Child Tax Credit affect divorced taxpayers who alternate taking the dependency exemption?

Divorced taxpayers who share custody of their children may hit a snag with the advance payments of the CTC.

It’s common for divorced parents who share custody of their children to alternate who claims the dependency exemption (and therefore the CTC). Because the 2021 advance payments are determined using 2020 tax return data, the parent who claimed the CTC in 2020 will be designated as the recipient of the 2021 tax credit advance payments. Right now, the IRS is aware this could pose a problem, but they do not yet have a solution. Most likely, divorced taxpayers can flag who will claim the 2021 dependency exemption on the online portal once it is up and running.

Don’t Stress! Tax Filing is Simple with 1040.com

Although the ARP Act made a lot of changes to the CTC, filing your 2021 return will be a breeze. At 1040.com, tax filing is quick and easy. Our software is user friendly and keeps things simple, and at just one flat rate of $25, you can’t go wrong.

 

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