There have been important changes to the Child Tax Credit that will help many families this summer. The American Rescue Plan ACT of 2021 expands the Child Tax Credit for tax year 2021 only, the legislation not only temporarily increases the amount each parent will receive, from $2,000 to $3,600 for children under 6 and $3,000 for children 6 and up, it also made the credit fully refundable and turned half of the credit into the advanced payments.
The monthly direct payments will begin starting this upcoming July 15. These payments are not an extra monthly payment, but rather a reduction of how much child tax credit parents will receive when they file their 2021 tax return. This monthly payment is simply an “advance” on what you would normally get when you file your return.
You can elect not to get the advance and receive the full amount when you file your return. Here is an example:
Noah and Ally have four kids, two under age 6 and two between 6 and 17. If they do nothing, the IRS will transmit a $1,100 payment to them starting in July. During 2021, they will receive a total of $6,600 and when they file their income tax return, they will receive the remaining $6,600 (assuming their income is not too high). Instead, they can elect to tell the IRS not to send the monthly payment and receive all $13,200 when they file their return.
There is no right or wrong to either decision. But the key is to realize this is not additional money but simply an advance.
Be advised that this credit begins to phase out by $50 for each $1,000 over $75,000 for single filers, $150,000 for married filing joint and $112,500 for head of household. Families within those income brackets can expect to receive $250 per month for each qualifying child aged 6-17, and $300 per month for each qualifying child under age 6.
Here are a few more questions we have had about this act:
Q. Does the new advance payment have an option to add qualifying dependents for newborn babies or for parents or grandparents who are appointed custodians after the 2020 return has been filed?
A:The IRS has indicated that their website will allow taxpayers to enter updated information into the system regarding their dependents. This would include adding new dependents; eliminating that dependents that no longer qualify; or other items. The website currently does not allow these changes yet.
Q. If I get this credit each month but then I don’t claim the dependent on my next return will I have to pay that back?
A:The child tax credit is not like the recovery rebate credit. The Recovery Rebate Credit does not have to be paid back. The child tax credit likely would have to be paid back if the child does not qualify. However, the IRS has not issued any type of guidance on this yet.
This is a warning for taxpayers that if they get a payment for a child that does not qualify that they may need to pay the advance back on their 2021 tax return.
These payments will not start until July 15 and the IRS will continue to update their website on details. We will keep you posted as more information is released.