The American Rescue Plan made several key changes to the Child Tax Credit for 2021, including advance payments. Here is some key information about the credit and how the advance payments work.
What is the Child Tax Credit?
Historically, the Child Tax Credit was available for certain taxpayers with eligible dependents and is $2,000 per child. To get the full credit, the taxpayer’s adjusted gross income must be under $400,000 for married taxpayers or $200,000 for all other filing statuses.
The American Rescue Plan increased the Child Tax Credit for taxpayers with adjusted gross income under $150,000 for joint filer taxpayers and reduced amounts for other filing statuses. If your income is under $150,000, your 2021 Child Tax Credit will be $3,600 per child for children age five and younger and $3,000 per child for children age six through seventeen.
What is the Advance Child Tax Credit?
As part of the American Rescue Plan, up to 50% of your 2021 Child Tax Credit will be advanced to you in monthly deposits starting July 15th. The estimate is based on your most recently filed tax return.
It is important to note that, unlike stimulus payments, this is an advance of a potential tax credit. If you receive too much, you will owe part (or all) of these payments back when you file your 2021 tax return in early 2022.
The IRS has provided several tools to help you manage your advance Child Tax Credits, including tools to check your eligibility, allow you to opt out of receiving the advance payments and provide non-filer information to receive payments if you have not filed 2019 or 2020 tax returns. These tools can be found here.
The IRS sent out letter 6417 to all eligible taxpayers (based on their previous filing), notifying them that the payments will begin July 15th and then will be paid on the 15th of each month. The IRS is also going to be providing tools to allow you to update your information for direct deposit and dependents later this year.
Can Taxpayers Opt Out of the Advance Child Tax Credit Program?
It is important to note that potentially eligible taxpayers will automatically be enrolled in the Advance Child Tax Credit program and must opt out of the program if they do not want to receive the payments.
Another important point is a taxpayer’s decision to opt in or out of the payments will not affect their eligibility to receive a 2021 Child Tax Credit. The Advance Payments are just an option, but if you do not take them monthly and you are eligible for a 2021 Child Tax Credit, you will get the full credit on your 2021 tax return.
If you choose to opt out of these payments, you will need to do it as soon as possible. There are opt out deadlines for each monthly payment.
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Access more information and commentary from Warren Averett’s tax advisors here.