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June 23, 2021 | Posted in:

The New Advance Child Tax Credit: Frequently Asked Questions [Video]

When the American Rescue Plan Act was announced in March of this year, one of the most widely discussed tax changes was the revamped Child Tax Credit. Not only were the income thresholds adjusted and refundable credit amounts increased, but monthly advanced payments of the credit would be made available to help families as the COVID-19 pandemic recovery continues.

 

Eligible taxpayers should have received a letter from the IRS this month and now have a decision to make — whether to stay automatically enrolled in the monthly payments set to begin this summer, or unenroll and claim the credit on their 2021 tax returns. Here is what you need to know to understand the 2021 Child Tax Credit, its implications, and to make your decision.

 

Video: The 2021 Child Tax Credit

Manager Chris Cicalese, CPA, MSTFP covers the basics and answers commonly asked questions about the new advanced Child Tax Credit.

 

 

Update: New IRS Portal Opens

On June 21, the IRS updated the Child Tax Credit Update Portal (CTC UP) and the Frequently Asked Questions on credit eligibility, calculations, and the monthly payment process. As of now, eligible non-filers can submit their information in order to receive the advance credit payments and those who wish to opt out of the monthly payments can now do so.

IRS Child Tax Credit Update Portal

 

Anticipated Dates IRS CTC Portal Updates
June 21 · Find out CTC eligibility
· Unenroll from monthly payments
· View list of payments
· Non-filers can submit their information
Late June · Edit or enter your bank and routing information
July 15 · Automatic monthly payments expected to begin
Early August · Make changes to your address on file
Late Summer · Make changes to your dependents, marital status and income
· Re-enroll in monthly payments if previously opted out
December 15 · Last monthly payments expected to be disbursed

 

Frequently Asked Questions about the Advance Child Tax Credit

What is the new Child Tax Credit?

For 2021, the child tax credit has been increased to $3,600 for children 5 & under and $3,000 for children ages 6 through 17. The IRS will look at the age of the child as of December 31st to determine which amount applies. The previous credit was $2,000 for children under the age of 17.
 

Who is eligible to receive the Child Tax Credit payments?

You are eligible for the Child Tax Credit if you have what the IRS calls a “qualifying child” and your main home is in one of the 50 states or Washington D.C. for more than half the year. Click here for the Advance Child Tax Credit Eligibility Assistant on IRS.gov.

However, your income may affect that amount that you are eligible to receive. Even if you have $0 in income, you can qualify for the advance Child Tax Credit payments, but if your income exceeds certain amounts, the credit amount begins to decrease. See “How will this new credit work?” below.
 

Who is an eligible “qualifying child” for 2021?

Per the IRS, a qualifying child is an individual who does not turn 18 before January 1, 2022, and who satisfies the following conditions:

  1. The individual is the taxpayer’s son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendant of any of them (for example, a grandchild, niece, or nephew).
  2. The individual does not provide more than half of his or her own support during 2021.
  3. The individual lives with the taxpayer for more than half of tax year 2021.
  4. The individual is properly claimed as the taxpayer’s dependent.
  5. The individual does not file a joint return with the individual’s spouse for tax year 2021 or files it only to claim a refund of withheld income tax or estimated tax paid.
  6. The individual was a U.S. citizen, U.S. national, or U.S. resident alien.

 

What if I haven’t filed my 2020 tax return yet?

If your 2020 return is extended, late, or still processing, the IRS will use your 2019 return to determine the amount. The IRS is expected to recalculate your payments once the 2020 return has been processed and will adjust the remaining payments accordingly.
 

When do the monthly Child Tax Credit payments begin?

The IRS expects the first payments to begin July 15, 2021 and continue until December.
 

How will this new credit work?

The tax credit will work similar to prior years except it will have two separate phaseouts if your income is too high. In both cases, the credit will decrease by $50 for every $1,000 over the income threshold. The first phaseout by the IRS only applies to the increase in the tax credit for 2021 (the additional $1,600 for children ages 5 and under; $1,000 for children ages 6 to 17) until it is reduced to the original $2,000 Child Tax Credit amount.

The first phaseout applies if your income is at least:

  • $150,000 if married filing jointly or qualifying widow/widower
  • $112,500 if filing as head of household
  • $75,000 if filing single or married filing separately

The second threshold is the same as prior years for the original amount, which starts to phase out at incomes of at least $400,000 for married filing jointly and $200,00 for all other statuses.
 
Once your 2021 credit is determined using prior tax filings, you should receive 50% of the total credit broken up into six monthly advance child tax credit payments unless you opt out. Turn to your CPA if you need assistance in calculating your exact Child Tax Credit amount.
 

How will the IRS send out the monthly payments?

Based on 2020 tax returns (2019 if 2020 is not yet filed), the IRS will send electronic payments to the bank account and/or address on file. Their Child Tax Credit Update Portal (IRS.gov/childtaxcredit2021) will allow taxpayers to notify the IRS of updates to that information later this summer.
 

What do I need to do if I want to receive the monthly payments? 

Nothing. The monthly advance payments are automatic. Action is only required if you wish to unenroll or if you need to update your information.
 

How do I alert the IRS of changes to my information?

Just like the Economic Impact Payments (stimulus checks), the IRS is expected to release various tools on their portal to allow taxpayers to make sure that the IRS has the most up to date information. Check IRS.gov for the latest information.
 

Should I opt out of the monthly payments?

If your family or life situation is expected to change in 2021 and will result in receiving excess advance child tax payments you should consider an opt out of the advance payments. This could be something like a change in filing status or an increase in income. Anyone that receives too much of the credit will have to repay it back to the IRS when they file their 2021 tax return. A portal to unenroll in the payments is now live at IRS.gov/childtaxcredit2021. Consider doing this as soon as possible as the first payments will be disbursed in mid-July. The IRS announced that the portal will allow you to update your information throughout the year as your situation changes or even re-enroll in monthly payments should you choose to do so.
 

How does it work if I am divorced or separated?

Whether you are divorced or separated, the IRS will determine the total credit based on the tax returns being filed. How your filing status is being reported on the latest return will determine how the IRS calculates the credit. If you are divorced and each year alternate who claims a child, it is important for both parents to update their information with the IRS when the portal is available to make sure they don’t receive an erroneous payment.
 

What if I qualify in 2020, but my income is greater in 2021?

If you expect your income to be higher in 2021 than 2020 it may be best to consider opting out of the advance payments as any excess payments would need to be paid back with the filing of your 2021 tax return. If you are unsure if you will qualify you can continuously update the portal with your information once it is available to adjust the payments as the year goes on. Though it may be hard to predict your income for 2021 until later in the year, so if you prefer to decrease the chance of a balance due because of excess child tax credit payments you should consider opting out.
 

What should I do with the money or after I get it?

These payments are not taxable as they are not considered income. If you receive the money you are free to do with it as you please. However, it is important to remember that should your circumstances change, you may owe it back to the IRS when you file your 2021 tax return in 2022.
 
More IRS Child Tax Credit FAQs

 

Contact Us

Alloy Silverstein is here to help. Do you need better clarification on your tax picture? Unsure if you should accept the monthly payments, opt for the lump sum, or apply the credit to next year’s tax return? Do you have a Child Tax Credit question that is not addressed above or on the IRS website? Contact us to schedule a video consultation.

 

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