In June 2021, the IRS announced a new program for families with children called the 2021 Advance Child Tax Credit Payments. This program allows a monthly advance from July 2021 through December 2021 of the yearly Child Tax Credit claimed on the individual return. This program can be beneficial for many, but it is important to understand the eligibility requirements and regulations beforehand.
2020 Child Tax Credit
Let’s rewind and take a look at the Child Tax Credit rules for 2020 to better grasp the changes for 2021. For 2020 returns, eligible individuals were entitled to receive a $2,000 credit for each qualifying child under 17. This credit would reduce the taxes due or result in a refund for up to $1,400 per qualifying child under 17. To be a qualifying child, all the following must be met: child is related to you, under the age of 17, did not provide more than half of their support, lives with you more than half the year, considered a dependent, is a US citizen or resident alien and the child does not file a joint return for the year. Eligible households must have a modified adjusted gross income below $400,000 for married filing joint taxpayers and under $200,000 for single taxpayers to receive the full credit. Once income exceeds these levels, the Child Tax Credit will be phased-out or reduced.
2021 Advance Child Tax Credit Payments
So, what is different with the 2021 Advance Child Tax Credit Payments? The first notable difference from the 2020 rules is the credit amount. Under the American Rescue Plan, the maximum Child Tax Credit was increased to $3,600 per child under 6 and $3,000 for children ages 6-17. The second major difference comes in the form of payment. For 2021, eligible individuals will receive up to 50% of the credit for each child in the form of monthly payments. Six monthly payments will occur between July 2021 and December 2021. The remaining credit amount will be available to claim when the individual tax return is filed. Monthly payments will be $300 per child under 6 and $250 per child ages 6-17. Child eligibility is determined as the age the child will be as of December 31, 2021. Another bonus of the 2021 Advance Child Tax Credit is that children aged 18 are eligible for a one-time check for $500. Similarly, children ages 19-24 and a full-time college student are also eligible for a one-time check for $500.
Do you qualify?
Along with all tax credits, the IRS sets out specific guidelines on who qualifies for these advance payments. To qualify, you must have filed a tax return for 2019 or 2020 to claim the Child Tax Credit, given your information to the IRS in 2020 for the stimulus checks, have your main home in the United States for more than half the year, have a qualifying child with a valid Social Security number and be under the income threshold. The income threshold for these payments are $150,000 for married filing joint taxpayers, $112,500 for head-of-household taxpayers and $75,000 for all single taxpayers. It is important to note the significant decrease in adjusted gross income to qualify for these advance payments. After that income level is met, the payments will be reduced by $50 for every $1,000 of income over the threshold. No income is necessary to receive these advance payments if the eligibility requirements are met.
How to Enroll
There are a few different ways to enroll to this program. The IRS bases information off the most recent filed tax return. In most cases this would be 2020. If an extension was filed for 2020, the 2019 tax return will be used. If the IRS determines you qualify based on a prior year tax return, you may be automatically enrolled for advance payments. If the Child Tax Credit was not claimed in a prior year, the IRS has a Non-Filer Submission portal on their website to enroll yourself. The items needed to enroll through the IRS website include your full name, current mailing address, email address, date of birth, valid Social Security number and bank account information. Only those who have not previously claimed the Child Tax Credit in 2019 or 2020 should use this feature. If the advance payments are not desirable, the IRS has an option to unenroll from these payments on their website through the Child Tax Credit Update portal. An existing IRS username or ID.me account and photo identification are needed to unenroll from advance payments. Unenrollment should be considered when your income is projected to exceed the threshold or someone else can claim the child in 2021. Unenrollment does not mean foregoing the Child Tax Credit altogether, but instead delaying receipt until the 2021 tax return is filed. Still confused? The IRS has launched the Child Tax Credit Eligibility Assistant portal for individuals to quickly determine if they qualify.
Once enrollment has taken place, whether that be automatic or through the IRS website, payments should begin to be received starting in July. The IRS has released a tentative payment schedule that outlines the following dates: July 15, August 13, September 15, October 15, November 15 and December 15. Payments will be in the form of direct deposit based on the information entered on the IRS website or prior year tax returns. Be sure to double check that the banking information is accurate to avoid issues in receiving these payments! The second half of the Child Tax Credit will be received on the 2021 tax return which will be filed in 2022.
Weighing the Advantages and Disadvantages
Just like any new change, there are pros and cons. The obvious pro is more money in your pocket each month. The advance payments can help struggling families by acting as income each month. The advance payments can be used for anything, from paying down bills to putting food on the table. On the contrary, there are a few different cons to this program. One of the cons is a lower tax refund at year-end. The advance payments reduce the Child Tax Credit received on the 2021 tax return by half. If you prefer a larger refund, you may want to consider unenrollment from these advance payments. Another major con of the advance payments relates to custody agreements. Usually when parents get divorced, they alternate years in which they are able to claim the children for tax benefits. If the IRS bases advance payments based on the prior year return, the wrong spouse will receive the Child Tax Credit. The spouse who claimed the children in the prior year should unenroll from these payments. The spouse who is allowed to claim the children in 2021 should update the information through the IRS portal. Although it sounds simple, most people are unwilling to remain honest and unenroll. How will the IRS handle this? All individuals who receive advance payments will receive a Letter 6419 at year-end describing the total amount of payments disbursed during 2021. This amount will need to be reported on the individual return. The spouse who incorrectly received these payments may need to repay the portion received so the correct spouse can claim the credit. Updating information through the IRS website is crucial if the advance payments are needed.
2021 rolls to a close, now what? Tax law can be very confusing and intricate and these advance payments are no exception. The IRS is not giving out free money. These payments are not like the stimulus checks where taxpayers do not have to repay any amount. If an individual incorrectly takes these advance payments, they may have to repay the excess. The IRS has not released exact guidance on repaying the excess but be on the lookout near the end of 2021. In order to ensure correct tax reporting, watch for Letter 6419 from the IRS. If you do not receive one, you may need to contact the IRS or pull bank statement records. Keep in mind that correct advance payments are not taxable on the return, but instead reduce the amount of the Child Tax Credit claimed. Furthermore, the advance payments do not affect government benefits. These advances are not considered income when the government is determining eligibility for certain federal and state assistance programs. Additionally, the IRS has not released any guidance on whether this program will continue into 2022. For now, the advance payments are for the last half of 2021 only. Tax law is constantly changing so there is no telling what future years of the Child Tax Credit will entail. For current information, check news sources or the IRS website.
Hopefully this article helps clear up any questions you may have about the 2021 Advance Child Tax Credit Payments. The guidelines surrounding this new program can be tricky and confusing. The IRS has a great Q&A section on their website that may answer any additional questions that arise.
All information derived from https://www.irs.gov/credits-deductions/2021-child-tax-credit-and-advance-child-tax-credit-payments-topic-a-general-information