The IRS is required by the American Rescue Plan Act to establish a program to help taxpayers with children by making periodic advance payments, July through December 2021, that equal, in total, 50% of the IRS’s estimate of the eligible taxpayer’s 2021 child tax credit (CTC).
The IRS announced it has started sending letters to the more than 36 million American families who may be eligible to receive these monthly payments starting July 15.
In addition, the Child Tax Credit Update Portal was launched yesterday, which includes the non-filer sign-up tool and an unenrollment feature for families to opt out of receiving the monthly payments.
The letters are being sent to American families who, based on their 2019 or 2020 filed returns (or who used non-filer tools to register for economic impact payments), may be eligible to receive the expanded and newly-advanced monthly CTC payments. A second personalized letter listing an estimate of the monthly payment will be sent to eligible families.
While more details are still being finalized on specific details of the payments, here’s an update on what we know so far:
The American Rescue Plan raised the maximum CTC in 2021 to:
- $3,600 per child for qualifying children under the age of 6, and
- $3,000 per child for qualifying children between the ages of 6 and 17
For 2021, a qualifying child with respect to a taxpayer is:
- Under the age of 18
- Can be claimed as a dependent, and
- Is a U.S. citizen or national, or a U.S. resident
The new maximum CTC is available to taxpayers with modified adjusted gross income (MAGI) of:
- $75,000 or less for singles
- $112,500 or less for heads of household, and
- $150,000 or less for married couples filing a joint return and qualified widows/widowers
Line 11 of the 2020 Form 1040 will indicated the MAGI for most taxpayers.
Before 2021, the CTC was $2,000 per eligible child, and 17-year-olds were not considered as qualifying children for the credit. If a taxpayer’s income exceeds the above-mentioned thresholds, the additional amount above the original $2,000 credit ($1,000 or $1,600 per child) is reduced by $50 for every extra $1,000 in MAGI.
For 2021, the entire credit is fully refundable, meaning eligible families can receive the CTC, even if they owe no federal income tax.
Advance payments will be paid to eligible families either by direct deposit or check.
The advance payments will be up to:
- $300 ($3,600 / 12) per month for each qualifying child under age 6, and
- $250 ($3,000 / 12) per month for each qualifying child ages 6 to 17
The payments will be issued on:
- July 15
- Aug. 13
- Sept. 15
- Oct. 15
- Nov. 15
- Dec. 15
The remainder of the credit will be applied to the 2021 tax return when it is filed in early 2022.
Here’s an example of what this could look like for one of your clients:
In 2021, Avery is entitled to CTC of $6,000 for her children Riley and Spencer. Avery would receive advance payments totaling $3,000 (50% of $6,000) from the IRS during July through December 2021. She will receive $500 per month ($6,000 / 12 = $500 or $250 per child) each month from July-December 2021. Avery would claim the remaining $3,000 credit when she files her 2021 return.
Other items to note
- The advance CTC payment program does not apply to bona fide residents of Puerto Rico and American Samoa.
- In determining the annual advance amount, the IRS will not factor in the death of a child if the death is known to the IRS at the beginning of the calendar year for which the estimate is made.
- IRS will provide taxpayers a written notice no later than Jan. 31, 2022, that includes the taxpayer’s identity number and the total amount of the payments made to the taxpayer during the calendar year, and other information the IRS determines is appropriate. Advise your clients to keep these letters and provide them to complete their 2021 return.
- The advance CTC is not subject to reduction or offset for:
- Past-due child support
- Non-tax debt owed to federal agencies
- Past-due state income tax obligations
- Unemployment compensation debts
- Any similar authority permitting offset
In addition, the advance cannot be reduced or offset by other assessed federal taxes that would otherwise be subject to levy or collection.
Note: The amount a taxpayer claims as CTC on their 2021 tax return would generally be subject to offset. No rules exist to protect taxpayers from debt collection actions that occur after a payment is received. For example, once the money is deposited into the taxpayer’s bank account, a garnishment and levy could be enforced.
- A reconciliation of the CTC and advance CTC payments will be handled on the 2021 tax return. It is anticipated the IRS will provide more guidance in this area.
Additional payment information
Throughout the summer, the IRS will be adding additional tools and online resources to help with the advance CTC. The page will feature tools such as:
- An interactive CTC eligibility tool to help families determine whether they qualify for the advance CTC payments
- A portal that will enable families to unenroll from receiving the advance payments, and instead, receive the full amount of the credit when they file their 2021 return in 2022
- Later during the year, taxpayers will also be able to use the portal to notify the IRS of:
- Changes in their income
- Change in filing status
- Changes in number of qualifying children
- Updates to their direct deposit information
- Other changes to ensure they are receiving the correct payment amount
More details will be available soon about the online CTC update portal. The IRS created a special Advance Child Tax Credit 2021 page that provides up the date information about the credit and advance payments. We will continue to monitor news and updates about the CTC portal, and will provide updates through our blog and on our Facebook page.