The $1.9 trillion American Rescue Plan that passed earlier this year expanded the Child Tax Credit, an initiative aimed at putting money in the pockets of families. If you have children, expect to see a letter in your mailbox from the IRS soon regarding the schedule for advance payments of the Child Tax Credit. Here are some of the most important details to know about the advance payments, and also some considerations for your 2021 tax return.

Who is eligible to claim the Child Tax Credit?
The expansion of the Child Tax Credit provides eligible parents a fully refundable credit of $3,000 for every child age 6-17, and $3,600 for every child under the age of 6. In order to qualify for the maximum Child Tax Credit amount, income limits are as follows:

Individuals can earn up to $75,000 in 2021
Heads of household can earn up to $112,500 in 2021
Joint filers can earn up to $150,000 in 2021
The credit phases out by $50 for every $1,000 in adjusted gross income above the income thresholds, with a complete phase-out. Eligibility is based on your most recent tax return. Further, you must also have a main home in the United States for more than half the year.

In previous years, the Child Tax Credit was $2,000 per child and was only partially refundable—meaning that if you owed less tax than the credit, you didn’t get a refund on that unused amount.

What are the $300 monthly payments of the Child Tax Credit?
The biggest change to the Child Tax Credit, as well as a more general change that we haven’t previously seen in our history, is when parents can expect to see the money. Taxpayers will now have the option of taking the credit via monthly payments of up to $300 per qualifying child, or traditionally when filing their tax returns. The IRS has released the following payment schedule:

July 15
August 13
September 15
October 15
November 15
December 15
It is key to note that if you would rather see the tax credit when you file your 2021 taxes, you must opt-out of advanced payments using the Non-filer Sign-up Tool. If you do not opt-out, you will automatically start receiving payments monthly via direct deposit or paper check. The remainder of the credit can be claimed on your 2021 tax return.

Use the Non-filer Sign-up Tool to opt-out and report your qualifying children born before 2021 if you:

Are not required to file a 2020 tax return, didn’t file one and don’t plan to; and
Have a main home in the United States for more than half of the year.
Also, if you did not get the full amounts of the first and second Economic Impact Payment, you may use this tool if you:

Are not required to file a 2020 tax return, didn’t file and don’t plan to, and
Want to claim the 2020 Recovery Rebate Credit and get your third Economic Impact Payment.
Should I opt out of the Child Tax Credit advance monthly payments?
The answer really depends on your income level, as well as what you expect to happen in 2021. The advance payments will be based on the income you reported on your most recent tax return—in most cases, that’s your 2020 return. So many people experienced devastating financial impacts from the pandemic in 2020, which could have brought their income into the eligibility range for the Child Tax Credit. However, if you expect your income to recover in 2021 and push you out of eligibility, you may be responsible for repaying those advance payments.

How do I calculate my monthly payment?
The IRS will be sending families a second letter with details of their estimated monthly payments. They have also opened an online portal where families can check their eligibility, update their income and number of qualifying children, check the status of payments, and opt-out of the program. The IRS will be updating this page in order to provide the most up-to-date information about the credit, payments, and portal.

Will receiving monthly payments affect my 2021 tax return?
Taxpayers should keep in mind that this is an advance payment of a tax credit. If you do not opt-out of the advance payments, you won’t get that credit when you file your 2021 return. Again, it all depends on your overall tax picture, but you will likely see a change to your tax refund or amount due if you typically claim the Child Tax Credit on your return and end up taking the monthly payments this year. Keep in mind that the credit is going to be larger than past years and receiving the advance payment does not actually change the net amount of taxes that you pay. It simply shifts the date when you receive the credit.

If you do receive the monthly payments, be sure to keep track of the amounts. Similar to stimulus payments, you’ll need to reconcile the amount received against the credit you’re entitled to when preparing your 2021 tax return.

If you’re concerned about how this change could affect your 2021 taxes, contact us to set up a consultation with a tax planner. We can review your overall tax situation and help you identify the best option for your family.