In March of 2021, Congress passed the American Rescue Plan Act (ARPA) and expanded the Child Tax Credit (CTC) temporarily. Previously, a maximum $2,000 credit was allowed for children under the age of 17 at the end of the year. ARPA increases this amount to $3,000 for children ages 6 to 17 (children who have not turned 18 before the end of the tax year) and $3,600 for children under the age of 6. ARPA requires the IRS to make advance monthly payments of this credit during the second half of 2021.
Will the Credit Be Limited Based on My Income?
Before 2021, the credit for low-income households that did not owe income tax was limited to $1,400 of the full credit. For 2021, these taxpayers will receive the full credit depending on the child’s age regardless of whether they have income or any tax is owed.
For taxpayers with higher income levels, some limitations will apply. The expanded portion of the credit ($1,600 for kids under 6 and $1,000 for those aged 6 – 17) will be phased out when income exceeds $75,000 for single individuals, $112,500 for heads of household, and $150,000 for married couples. The base $2,000 credit remains and will be phased out once income reaches $200,000 for individuals and $400,000 for married couples.
When Will My Monthly Payments Start?
Monthly payments will begin on July 15th and will be issued by the IRS. The payments will continue through December and will be paid on the 15th of each month unless it falls on a weekend. If the 15th falls on a weekend the payment will be made the following Monday.
What Will My Payment Be?
The monthly payments will be 1/12 of the estimated annual credit. To determine your advance CTC, the IRS will look at your 2020 return, or, if it’s not yet filed, your 2019 return. Taxpayers will receive half of the credit on their 2021 taxes and the other half through advance monthly payments through the last half of 2021.
Will My Refund Be Reduced?
If you are used to receiving a large refund based partly on the child tax credit you claim, your refund could be reduced by the advanced payments.
Will I Have to Repay the Funds if I Receive too Much in Advance Payments?
If you receive advance CTC payments that are in excess of the CTC actually allowable to you in 2021 when you file your return, you will have to repay those excess amounts (by increasing the tax liability reported on your 2021 return).
Notices will be sent by the IRS at the end of the year to assist in reconciling the payments received with the credit that will be allowed on the tax return.
Do I Need to Do Anything to Receive the Payments?
No, the IRS will use information from your 2019 or 2020 tax return to determine eligibility for the monthly payments. The direct deposit information on your tax return will be used to make the payments automatically. If direct deposit information is not provided, then paper checks or debit cards will be mailed.
Can I Request to NOT Receive These Payments?
Yes, an online system is currently being developed by the IRS to allow taxpayers to opt out of the monthly payments. Taxpayers will then be able to take advantage of the full credit on their tax returns.
Can I Update My Bank Account and Family Information?
The IRS is still working on a system for taxpayers to update their address, bank account, income, family size, and child custody.
What Happens to the Credit in 2022?
Unless Congress enacts further legislation, the monthly payments cease at the end of 2021 and the CTC will return to $2,000 for each child under the age of 17 at yearend.
We realize this tax season has been particularly confusing and we have invested time into understanding the particular topics our clients may face. If you have questions regarding the expansion of the Child Tax Credit, our experts are available to answer your questions.