Beginning in July, some taxpayers may begin receiving payments of up to $300 per month as advance payments of an increased child tax credit. Here is an outline of the changes. As usual, there are many more details behind the law, and clarifications are issued on a regular basis.
What Is it?
The American Rescue Plan raised the maximum Child Tax Credit in 2021 to $3,600 for qualifying children under the age of 6 and to $3,000 for qualifying children between the ages 6 and 17. Before 2021, the credit was worth up to $2,000 per eligible child.
Beginning in July 2021, taxpayers may start seeing an advance payment of up to $300 per month for this credit (up to $250 per month for children between the ages of 6 to 17).
The new maximum credit is available to taxpayers with a modified adjusted gross income (AGI) 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 and widowers.
Above these income thresholds, the extra amount above the original $2,000 credit — either $1,000 or $1,600 per child — is reduced by $50 for every extra $1,000 in modified AGI.
The advance payment is based on either your 2020 tax return, or your 2019 return if 2020 has not yet been filed.
Should I Opt-Out?
Since the advance payment is based on your 2020 or 2019 tax return but the actual credit is based on 2021 income, there is a risk you may have to repay all or a portion of the amount received in 2021. If you expect to qualify for a lesser credit than paid because your income has increased in 2021, you may want to either opt-out, or put the payments into a savings account so you have the funds to repay it when your taxes are filed next year. The credit will be calculated and reconciled on the 2021 tax return; if you opt-out and the calculation shows you should have received it, you will still receive the credit on your 2021 tax return.
The IRS urges individuals and families who haven’t yet filed their 2020 return – or 2019 return – to do so as soon as possible so they can receive any advance payment they’re eligible for.
Filing soon will also ensure that the IRS has their most current banking information, as well as key details about qualifying children.
The IRS has created a special Advance Child Tax Credit 2021 page at IRS.gov/childtaxcredit2021, designed to provide the most up-to-date information about the credit and the advance payments.