Like many Americans who have child dependents on your tax return, you may have recently received a letter from the IRS regarding advance payments of the Child Tax Credit. If you are wondering how this will affect you, we have compiled some FAQs below that will hopefully answer the questions you may have.
What has changed with the Child Tax Credit?
The American Rescue Plan Act of 2021 increased the Child Tax Credit amount for one year. It now allows 17-year-olds to qualify for the credit, and increases the credit to $3,000 per child ($3,600 per child under age 6). This is an increase over the $2,000 credit available on the 2020 tax returns. Additionally, the IRS is required to make advance payments to qualifying families in the second half of 2021.
Do I qualify for the increased credit?
Not all families will qualify. The increased credit begins to phase out at adjusted gross incomes (AGIs) of $75,000 on single returns, $112,500 on head-of-household returns, and $150,000 on joint returns. The IRS will use your AGI from your 2020 return, or your 2019 return if your 2020 return has not been filed.
Note that these phase-outs apply only to the increased credit. The original $2,000 credit will retain its original phaseout of AGI of $400,000 for joint returns and $200,000 for single and head of household.
Do I qualify for the advance payments?
You qualify for the advance payments if you have a qualifying child. The IRS will base eligibility for the advance payments on previously filed tax returns. It will first look to your 2020 return, and then to your 2019 return if the 2020 return has not been filed.
How will the payments be made?
The payments will be made via monthly payments from July through December 2021. The first round of payments will arrive on July 15. The payments will be made through direct deposit if the IRS has this information. Otherwise, the IRS will send paper checks or debit cards.
The advance payments will account for half of a family’s 2021 child tax credit. The amount is dependent upon the number of qualifying children in the family, the ages of the children, and the family’s adjusted gross income. If your credit is not phased out by your adjusted gross income, then you would receive $300 per month for a child under 6, and $250 per month for children ages 6 through 17. The IRS plans to send another round of letters estimating the family’s monthly payment amount.
Will these payments affect my 2021 tax return?
While the payments are not taxable income, the advance credit payments you receive will reduce your child tax credit on your 2021 tax return. Families will receive half of the credit in advance payments and the other half on their 2021 tax return.
In January 2022, the IRS will send a letter to provide the total amount of advance Child Tax Credit payments received. You will need to save this letter with your 2021 tax documents to reconcile the advance payments on your tax return.
Can I opt out of these advance payments?
You can visit www.irs.gov/childtaxcredit2021 to opt out of the advance payments. This will not affect your ability to receive the full credit on your 2021 tax return. The IRS expects this option to be available by the end of June.
What if I have more questions?
Feel free to contact your JMF accountant with questions, or visit www.irs.gov/childtaxcredit2021 for more questions and answers.