There’s an important tax change for families this summer—and it starts this week. As part of the American Rescue Plan, the IRS will begin sending advance child tax credit payments on July 15.
The credit isn’t new but rather an expansion of the existing child tax credit. Not only is it more money, but families will receive the credit each month in the form of advance payments. This is a change from prior years when the credit was paid in a lump sum at tax time.
Since it’s such a significant change, here’s what you need to know.
How much is the credit?
For 2021, the maximum child tax credit is $3,600 per child for those five and under and $3,000 per child ages 6 to 17. That works out to $300 per month for children who are five and younger and $250 for those between the ages of 6 and 17.
So if my 2021 credit is $3,600, how much will I get as an advance payment?
$300 per month. Here’s the math: Half of the credit will be distributed in six monthly installments through December 2021. The remainder will be calculated and paid out at tax time in 2022.
How will the IRS know how much to send me?
The IRS will estimate the credit based on your 2020 tax return. If you have not yet filed, or if your 2020 tax return has not been processed, the IRS will use the info on your 2019 tax return.
Are there any income limits?
This is where it gets tricky: The credit has two phaseouts. Phaseouts mean that your payment will go down as your income goes up.
The number that matters to most taxpayers is adjusted gross income, or AGI, found on line 11 on your 2020 Form 1040 or line 8b on your 2019 Form 1040). Taxpayers who file Form 2555 (related to foreign earned income) or have income from Puerto Rico or American Samoa may need to make adjustments.
As part of the first phaseout, if your income exceeds $75,000 for individual taxpayers, $150,000 for married taxpayers filing jointly, and $112,500 for taxpayers filing as head of household, the credit will be reduced in increments to $2,000 per child. If that amount sounds familiar, you’re right: That was the amount of the credit before any changes were made in 2021.
The second phaseout reduces the credit below $2,000 per child if your income exceeds $400,000 for married taxpayers filing jointly and $200,000 for everyone else.
I know I don’t make too much money, but what if I make too little?
No worries: Even if you have no income, you can receive payments if you otherwise qualify.
Who qualifies for the advance payments?
You generally qualify for advance payments if you have a qualifying child and you—and your spouse, if married filing jointly—have a Social Security number (SSN) or an Individual Taxpayer Identification Number (ITIN).
Who is a qualifying child?
The rules are pretty much the same as before, except that the magic age is 17 or younger—it’s no longer 16. The child must still be your dependent with a valid SSN and be your son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendant of any of them—like a grandchild or nephew. The “old” child tax credit support and residency rules still apply.
What about my mom/cousin/boyfriend that I may be supporting?
The advance payments only apply to the child tax credit. This is not the same as the $500 Credit for Other Dependents.
What do you have to do to qualify for the advance payments?
Most families won’t have to do anything: Payments will be based on your 2019 or 2020 tax return, or information from the IRS Non-Filer tool. If you haven’t filed or registered, you’ll need to use the Non-Filer tool to file a simplified tax return.
How will I get paid?
Most families will receive payments via direct deposit. The IRS will use the bank account information on your most recently filed 2019 or 2020 tax return, the Non-Filer Tool, or from a federal agency like the Social Security Administration that provides your benefits. If the IRS doesn’t have your banking info, they will mail a check.
When—and what time—will I get my payment?
The first child tax payments will go out on July 15 via direct deposit and some families have already reported (via social media) seeing the funds in their bank accounts in the early morning. That’s similar to what happened with stimulus checks. But it can be bank-dependent, so if you don’t see your payment immediately, don’t panic. There could be a delay while your bank processes the payments. And remember, the process will be the same each month through December of 2021.
What if my bank account information has changed?
You can update your information using the IRS portal.
What if my address has changed? Or if I have more children or some other change?
You can’t make those changes yet, but the IRS is working on the portal.
Are these payments taxable?
Will these payments put my benefits at risk?
No. These payments will not reduce your federal benefits—or state or local benefits paid with federal dollars.
Will my payments be offset if I owe taxes or child support?
No. Payments won’t be reduced for state or federal taxes or debts, or child support. However, once funds hit your bank account, they may be subject to garnishment from non-federal creditors.
What if I don’t want the advance payments?
If you don’t want the advance payments, you can unenroll through the IRS portal. If you file as married, both spouses need to unenroll—if just one of you does, you will receive half of the payments.
Wait, why would someone not want the advance payments?
You might not want the payment because you would rather claim the full credit when you file your 2021 return, or you know you will not be eligible for the full credit on your 2021 return.
That makes it sound like there might be a repayment obligation. Am I right?
Sort of. The payments that you receive are based on an estimate of the amount of child tax credit you would be entitled to claim on your 2021 tax return. When you file your 2021 return, you may have to pay back the extra if you received too much.
Now I’m scared that I’ll owe, but I don’t usually have to pay taxes.
Most families should get the right amount. But if you don’t, there is a safe harbor, called “repayment protection,” subject to phaseouts. The full repayment protection amount is $2,000 for each “extra” child, or $2,000 times the difference between the number of qualifying children that the IRS used to estimate your advance payments and the number of qualifying children claimed on your 2021 tax return. You can use that amount to offset any overpayment.
That math sounds complicated. Can you give me an example?
Yes. Let’s say you claimed two qualifying children on your 2020 tax return, but now you just have one on your 2021 tax return. Your full repayment protection amount is $2,000 ($2,000 x one extra qualifying child). So, if you were overpaid by $2,000, you would offset it with your $2,000 repayment protection amount and not owe anything.
What about those phaseouts?
If your 2021 AGI is less than $40,000 for individual taxpayers, $60,000 for married taxpayers filing jointly, or $50,000 for taxpayers filing as head of household, then you will qualify for the full repayment protection amount. That means no more math.
But as your income goes up, the value of your repayment protection amount will go down. You won’t qualify for any repayment protection when your AGI reaches $80,000 for individual taxpayers, $120,000 for married taxpayers filing jointly, and $100,000 for taxpayers filing as head of household.
I don’t understand. How could I receive more payments than I am entitled to receive?
There are a few reasons that might happen. For example, if your 2020 tax return included two qualifying children but you only have one qualifying child in 2021—or if your income has changed significantly—the total amount of the credit would be less.
The opposite should also be true, right?
Right. When you file your 2021 return in 2022, if the amount of your available credit is more than your advance payments, you can claim the remaining credit on your return—and you may be entitled to a refund.
What if I’m divorced?
The normal child tax credit rules apply. If you alternate custody and you aren’t entitled to claim your child in 2021, you may want to unenroll so that you don’t receive an overpayment.
Got it. So what happens next year?
So far, there are no plans for the expanded credit or the payments: It’s only for 2021.
This is a weekly column from Kelly Phillips Erb, the Taxgirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.