WASHINGTON — The Child Tax Credit will look very different in 2021 due to the American Rescue Plan Act. The payments will be larger, they will be sent out to more people and they will be issued on a monthly basis -- rather than as a yearly tax credit.
IRS officials announced on June 7 that it has started sending letters to more than 36 million American families, who "may be eligible to receive the monthly credits." The actual payments will begin on July 15, 2021.
With so many changes to the tax credit, the VERIFY team is clearing up confusion, and answering some of the biggest questions about these monthly payments.
H&R Block, "New 2021 Child Tax Credit Payments: How much will I get and when?", May 25, 2021
Henry Grzes, Lead Manager for Tax Practice & Ethics at Association of International Association of Certified Professional Accountants
Congressional Research Service, "The Child Tax Credit: Temporary Expansion for 2021 Under the American Rescue Plan Act of 2021", May 12, 2021
Who qualifies and how big are the checks?
According to the IRS, for 2021 the tax credit will increase to $3,600 per qualifying child under age six, and $3,000 for each qualifying child between the ages of six and 17. In the past, the maximum payment was just $2,000 per child.
The payment is only for families with qualifying incomes, which are as follows:
- Individual Taxpayers: $75,000 per year
- Heads Of Household: $112,500 per year
- Married Taxpayers Filing Jointly: $150,000 per year
Above these incomes, the credit will start to phase out.
For individuals, the credit will phase out to zero at an income of $200,000. For a married couple filing jointly, it will phase out to zero at $400,000.
How does the 2021 Child Tax Credit Differ from the CTC of past years?
According to the IRS, there are four main factors to keep in mind, when considering the 2021 Child Tax Credit:
- Increased Payments: Previously, the CTC paid $2,000 per qualified child, whereas it has increased significantly in 2021
- Expanded Eligibility: Previously, the CTC was not offered for 17-year-old children. This year a parent can collect up to $3,000 for their 17-year-old child.
- Monthly Payments: Previously, the CTC was given as a lump sum tax credit during tax season. This year, parents will receive six monthly payments from July to December. They will also be able to collect a tax credit during tax season, for the first six months of the year.
- Fully Refundable: According to IRS, this means that taxpayers "can benefit from the credit even if they don't have earned income or don't owe any income taxes."
When will monthly payments arrive?
In a June 7 announcement, the IRS said that it has started to send out letters to more than 36 million American families who "may be eligible to receive monthly Child Tax Credit payments starting in July."
The IRS said that eligible families will soon receive a "second, personalized letter listing an estimate of their monthly payment." This announcement also included a timeline of monthly payments, which are as follows:
- July 15th
- August 13th
- September 15th
- October 15th
- November 15th
- December 15th
"Eligible families will begin receiving advance payments," said the IRS. "Either by direct deposit or check. The payment will be up to $300 per month for each qualifying child under age 6 and up to $250 per month for each qualifying child ages 6 to 17."
Will I be able to opt-out of the CTC monthly payments?
Those who are eligible to receive the monthly payments have the option to opt-out, according to Henry Grzes, from the AICPA.
"The idea is Congress passed these rules to get money into the hands of people quicker, but some people don't necessarily want the money spread out over the last six months of the year, they'd rather get it all at once," Grzes said. "So there will be an option to opt-out."
That will be done through an IRS portal, which the agency hasn't released yet, but says it will roll out "in the next few weeks," according to a June 7 press release.
The choice to opt outcomes down to, whether you want the cash split over six months, or the whole lump sum during tax season.
If I had a baby in 2021, will I receive a check for them?
According to Grzes, new parents will be able to collect the $3,600 for their newest member of the family.
However, if these parents want it in monthly installments, they'll have to take an additional step.
That's because the payments for the Child Tax Credit are based on the latest tax return, which is 2020 at the latest. For this reason, a new 2021 baby would not be included.
New parents should be able to use an IRS portal once it's available to update their information and add any new family members. Once the information has been updated, families should be able to receive monthly payments.
Alternatively, new parents can simply file their 2021 taxes next year. If the parents do this, they will receive their Child Tax Credit as one lump sum.
"So a child born on December 31, 2021, is going to be treated the same way as a child born on January 1, 2021," Grzes said. "They would get the full amount."
Will I receive a payment for a 17-year-old who turns 18 in 2021?
Since the Child Tax Credit is based on a child's age on the latest tax returns, the Verify team looked into whether a child that turned 18 years old in 2021 would qualify for a payment.
Grzes said that's not the case.
What if I have shared custody? Who gets the payment?
According to Henry Grzes, only one parent can claim the Child Tax Credit. "Double-Dipping" where two individuals collect payment for one child is not allowed.
Generally speaking, the payment will go to the parent who is with the child for the majority of the year.
It's possible for the parents to work out an agreement where the parent who typically claims their children as dependents, allows the other parent to get the child tax credit instead. For instance, in a situation where one parent with majority custody doesn't qualify because they exceed the income limit.
"You fill out a form, one spouse sends it to the other, he or she signs off on it, releasing their right to the dependent exemption, and then that person who's claiming their dependent has that proof because you can't have both people trying to claim the same dependent on their respective returns," Grzes said.
Do you need a tax return in order to qualify for the Child Tax Credit?
You don't, Grzes explained
"They weren't obligated to file a return for 2019 and 2020, because [of] their income level, they're still eligible," Grzes said.
In that situation, a person can file a simplified tax return, even though you have no tax liabilities.
"You sign it under penalties of perjury, and so now the IRS has a return for you for 2020 and they can start making those advanced payments," he said.