While it’s always nice to receive some extra cash, many Americans don’t fully understand how the payments work, what they’re for, or how they could potentially impact their 2021 tax return. Let’s take a closer look at the Advance Child Tax Credit, and the options available to you.
What is the Advance Child Tax Credit?
In 2020, eligible taxpayers could claim a maximum Child Tax Credit of $2,000 per child under the age of 17. As part of the American Rescue Plan Act of 2021 however, the Child Tax Credit was expanded to a maximum of $3,000 for each child between the ages of 6 and 17, and $3,600 for each child under the age of 6. In years past, you would claim the Child Tax Credit when filing your income taxes, but the 2021 Child Tax Credit allows for half of it to be paid in advance.
These advance payments started going out to eligible American families on July 15, 2021, and will continue through December of 2021. In most cases the payments are automatic. Families who filed tax returns for 2019 or 2020, or who utilized the IRS’ “Non-Filer” tool in to receive a stimulus check, do not need to take any action. Likely, they’ve already received their first payment, and will continue to receive them through the end of the year. For those who have not filed taxes in the past 2 years, or who have not otherwise signed up to receive stimulus payments, the IRS does have a Non-filer Sign-up Tool that can be used to register.
How Do I Know If I Received the Correct Amount?
Earlier in July, many American families received their first monthly Advance Child Tax Credit payment, either by a payment directly deposited into their bank account, or by a paper check sent through the mail. While some families were pleasantly surprised by their first payment, others received less money than they expected.
The exact monthly amount each family receives depends on a few factors including:
• The number of children in your household
• The ages of those children
• Your adjusted gross income
To determine the eligible age for each of your children, you’ll have to look at how old they will be on December 31, 2021. So, if you have a 5 year old now, but they will turn 6 on or before December 31st, they will be counted as a 6 year old, even though the advance payments began in July. For children under the age of 6, you could receive a maximum Child Tax Credit of $3,600 per child. Since only half of the tax credit is available in advance, you’d be looking at $1,800 ($3,600 divided by 2) spread across 6 monthly payments; in other words, $300 per month from July through December. For children between the ages of 6 and 17, you could receive a maximum tax credit of $3,000 per child. The advance payment on that would be $1,500 ($3,000 divided by 2). Split across 6 payments, that would be $250 per month paid July through the end of the year.
It’s important to keep in mind that the numbers described above are the maximum amount you could receive per child. If your adjusted gross income exceeds the eligibility thresholds, your 2021 Child Tax Credit amount will be reduced. There are some handy Child Tax Credit calculators available online that can help you determine your eligibility, and estimate how much you should be receiving.
It’s also worth noting that if you and your child’s other parent are separated, only one parent is eligible for the Child Tax Credit. Typically, this will be the parent that the child is with for the majority of the year, or the parent who is deemed the child’s “custodial parent” for tax purposes. In some cases, parents alternate who claims the child on tax returns each year.
What If I Didn’t Receive My First Payment Yet?
If you believe you’re eligible for an Advance Child Tax Credit payment, but have not yet received one, a good first course of action is to visit the IRS’ Child Tax Credit Update Portal. By clicking the “Manage Advance Payments” button, you’ll be prompted to either log into your existing IRS account (if you’ve created one in the past to manage or pay your federal taxes), or create a new account.
Through the portal, you’ll be able to view your eligibility status which is based on your last tax return. You’ll also be able to see which payment method the IRS currently has on file for you, and change it if necessary. The portal will also provide you with an overview of any Advance Child Tax Credit payments that have been processed for you thus far.
After I Get My Last Advance Payment, When Will I Receive the Other Half of My Child Tax Credit?
Most eligible American families will receive the first half of their 2021 Child Tax Credit through monthly payments that will go out between July and December. The remaining half of the credit will be received when filing your 2021 federal income taxes. This could come in the form of a tax refund, or it could go toward reducing the amount of taxes you owe.
How Will the Advance Child Tax Credit Payments Impact My Tax Return?
One important thing to note is that the Advance Child Tax Credit payments you receive between July and December will not be considered income when you file your 2021 taxes. However, the monthly Child Tax Credit payments you receive between July and December will reduce the amount of the credit you can claim on your taxes. In other words, if you’re eligible for a $3,000 Child Tax Credit and you receive the first half via advance monthly payments, you’ll only be able to claim the remaining $1,500 when you file your taxes. If you chose to opt out of the advance payments however, you would be able to claim the entire $3,000 when filing your taxes.
Some Americans who typically owe money when they file their taxes are choosing to opt out of the advance payments so they can claim the full credit amount at tax filing time to help reduce their tax bill. Other Americans are choosing to opt out so they can receive the entire credit as part of their tax refund. Ultimately, deciding whether to opt out of Advance Child Tax Credit payments is a personal decision that will depend on your own financial situation. If you’re wondering whether it’s the right move for you, it might be worth consulting a tax professional who can help you weigh all of the pros and cons.
As of right now, no decision has been made regarding whether the expanded Child Tax Credit is here to stay, or if it will revert back to its former amounts and thresholds in 2022. The good news though, is that the 2021 changes will help to put more money into the pockets of many American families. For the most up-to-date information regarding 2021 Advance Child Tax Credit Payments, please visit https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021.