The U.S. Treasury will start sending payments for the expanded child tax credit July 15, and eligible taxpayers could receive as much as $300 a month per eligible child through December. The rest will come with your 2021 tax refund when you file in 2022. About 39 million households will be eligible for the payments.
What is the child tax credit?
Unlike a tax deduction, which reduces your taxable income, a tax credit reduces your tax payments dollar for dollar. The revamped child tax credit for 2021 is more generous than in previous years, expands eligibility and establishes partial distribution through advance payments starting July 15. The child tax credit is also fully refundable, which means taxpayers can receive the entire credit even if they don't have earned income or don't owe any income taxes. Previously, only $1,400 was refundable.
The overhaul also drops the requirement for earned income, making the credit a possibility for older adults with income solely from social security, pensions or IRAs who have a dependent child or grandchild age 17 or younger. Most eligible families will receive advance payments automatically, unless they opt out, but people who were not required to file a tax return will need to take action to receive the cash this year.
The revisions, made through the American Rescue Plan Act of 2021, are applicable only for tax year 2021.
The IRS began sending letters the week of June 7 to families eligible for the credit. A second letter will be sent at a later date specifying the amount of money, says IRS spokesman Eric Smith.
Who is eligible
The program has been expanded to cover 17-year-olds in 2021. Eligible families claiming the credit will receive $3,000 per qualifying child ages 6 through 17 and $3,600 per qualifying child under age 6. Previously, the amount of the credit was up to $2,000 per child age 16 and under. Age is determined as of Jan. 1, so children turning 18 on Jan. 2 or later are still eligible for the $3,000 credit, and children turning 6 on Jan. 2 or later qualify for the $3,600 credit.
The tax credit is reduced, or phased out, for people with modified adjusted gross incomes at or above $150,000 for married taxpayers filing a joint return and qualifying widows or widowers, $112,500 for heads of household and $75,000 for singles.
Another new feature is that advance payments, totaling up to 50 percent of the credit, will be made monthly from July through December to eligible taxpayers who have a main home in the U.S. for more than half the year. The payments will be made by direct deposit, paper check or debit card. If you received a tax refund — or stimulus payment — through direct deposit, it is very likely you would receive the child tax credit advance payments electronically, says Smith, noting that the IRS prefers to pay via direct deposit. Others would likely receive a check or debit card.
"The goal, in general terms, is to migrate as many people to electronic delivery of money, as much as possible,” Smith says.
Make sure you get your checks
The IRS will send advance payments based on an estimate from 2020 tax returns, or 2019 returns if the 2020 return has not been filed and processed. Payments will come automatically; most people do not need to do anything.
But certain individuals must take action to receive the advance payments. Historically, people needed to have at least a base amount of earned income, such as wages or self-employment, to qualify for the child tax credit. But in 2021, there is no earned income requirement, so people with other income, such as social security, supplemental security income, pensions or IRAs, who have a dependent child or grandchild could qualify. “If somebody is in that category and they don't normally file a return, they may want to file — and I'd say file pretty soon — so that we have something to base the payment on,” says Smith.
One exception would be people who, though not required to file a return because their income was too low or it was non-taxable social security or supplemental security income, used the IRS’ non-filer tool to claim stimulus payments. “When people did that, that was actually considered to be a basic return,” says Smith. “If they did that, then we've got that record. … If their situation is still comparable or similar in 2021, they'd be able to get [child tax credit] payments on that basis."
The Non-filer Sign-up tool is for people who did not file a tax return for 2019 or 2020 and who did not use the IRS Non-filers tool last year to register for stimulus checks. The tool lets you provide required information about yourself, your qualifying children age 17 and under, your other dependents, and your direct deposit bank information so the IRS can quickly and easily deposit the payments directly into your checking or savings account.
You can opt out of monthly payments
Families can choose to opt out, or unenroll, from the advance payments over six months and receive the credit at the end of the year. The opt-out option may also appeal to taxpayers who would be eligible for the credit based on their 2020 return but know their 2021 income will be too high, making them ineligible. If a family receives advance payments but ends up not being eligible because their 2021 income is too high, they will need to pay back those early disbursements when they file their 2021 return.
The IRS plans to hire more customer service representatives to handle an anticipated uptick in inquiries about changes to the child tax credit. But some tax accountants are already fielding inquiries.
At recent webinars hosted by CDH, P.C., an accounting firm headquartered in Itasca, Illinois, there has always been at least one question about the child tax credit, says Naoko Lech, tax principal at the firm. Taxpayers want to know about the timing and amount of the credit, Lech says, and many don't know they can opt out of receiving advance payments.
Some clients are unaware that they may need to return some or all of the credit if their 2021 income exceeds the maximum threshold, thinking the credit is similar to the economic impact payments, or stimulus checks, which did not have to be repaid.
"That usually surprises the taxpayer, because they think this is just a rebate,” says Lech.
Lech explains to clients that if they need the money now and are unsure about what their 2021 income will be, they can take the advance payments in the second half of the year. But they should realize that if this year's income is too high, they will owe money when they file their 2021 return. If taxpayers know their 2021 income will be too high for the credit, they may prefer to opt out of the advanced payments, Lech says.
But Neil Becourtney, a tax partner at CohnReznick in New Jersey, doesn't expect many people to opt out of the advanced payments. “I can't really fathom why anyone would go out of their way to take the IRS up on their offer to decline receiving these advanced payments,” says Becourtney. “I don't think very many people are going to delve into it with that much analysis.”
Also, having income above the threshold does not mean money will be owed next April, notes Becourtney. If a taxpayer's wages increased, it is likely their federal withholding also went up, or maybe their itemized deductions are higher, he says.
But taxpayers will be in something of a predicament, as Becourtney puts it, if they get the advance payments, spend the money, become ineligible for the credit and then don't have the cash to pay the IRS back next April. “But, again, I doubt very many people are going to have such foresight to figure that all out and say, ‘Wow, I better halt these payments and not accept them,’ “ Becourtney says.
Sharon Waters, a former CPA, has written for Wired.com and other publications.