Updated: Oct 23, 2021
The American Rescue Plan Act signed on March 11th not only provided the 3rd stimulus checks of $1,400 it also expanded the child tax credit. This is great news for many parents but because so many things were changing at one time taxpayers didn’t get their questions answered as the IRS was deciding how the credit would work and tax professionals were waiting on their guidance.
Now that tax season is over, I want to make sure that I answer the top questions that I received about the child tax credit expansion 2021 so you know how the advanced child tax credit payments work and what to expect. We’re going to start with the basics and then dig a little deeper into the questions I’ve received from my clients and you, my subscribers.
Question 1: What is the child tax credit?
Answer: The child tax credit is a non-refundable tax credit that was created in 1997 to account for the rising cost of raising a child. Tax credits reduce a taxpayer’s tax liability dollar for dollar. The original tax credit was $500 but has since been expanded to $2,000 under the Tax Cuts and Jobs Act (TCJA) for children under the age of 17. Since it is non-refundable only taxpayers that have a tax liability can benefit from it. If the full $2,000 is not used it converts to the Additional Child Tax Credit which is refundable up to $1,400.
Question 2: What did the American Rescue Plan Act expand and change?
The ARPA increases the amount of the Child Tax Credit for 2021 from $2,000 per child to $3,600 for children under 6.
It includes 17-year-old dependents and expanded the amount for them and children down to the age of 6 years old to $3,000.
The credit is now fully refundable instead of being limited to $1,400 and allows for families to receive up to half of it in advance during the second half of 2021.
Families can benefit from the credit even if they don’t have a tax liability which helps families with little or no income from a job, business or other source.
Question 3: Who will receive the advance payments and how much are they?
Answer: It is estimated that 39 million households will receive these payments. Payments of $250/ month per child will be issued for children 6-17 and $300/ month per child for children 5 and under. The following households with a modified adjusted gross income below the thresholds listed are the ones that qualify for the full amounts:
Single – $75,000 or less
Head of Household - $112,500 or less
Married Couples filing Jointly or Qualified Widow(er)s - $150,000 or less
So if you are a family of 4 with a modified adjusted gross income of $100,000, 7 year old, and 2 year old you could expect your advanced payments to be $550/ month.
Note: You can find your Adjusted Gross Income on Line 11 of your 2020 1040
Question 4: If we make more than $150,000 (MFJ) will we still get the credit?
Answer: Yes, potentially just not the full amount. The increased amounts of the credit ($1,000 or $1,600) will be phased out for those with modified adjusted gross incomes higher than the threshold for those getting the full amount.
They will be reduced $50 for every $1,000 until it is reduced to $0 for the increased amount.
Question 5: Why is the government making monthly payments instead of just waiting until the end of the tax year like usual?
Answer: Advocates for the expansion believe that it will be more effective in helping parents and children if they have the money sooner rather than waiting to file a tax return to get it. I agree with them!
Not only is the cost of raising a child constantly going up but there are many parents that were set back financially last year due to the pandemic. This will hopefully help them in providing for their child(ren) so they can begin catching back up financially.
Question 6: When will payments begin and how long will they last?
Answer: Payments will begin on July 15th and go on until December 31st. The total of the advance payments will be up to 50 percent of the Child Tax Credit. Advance payments will be estimated from information included in eligible taxpayers' 2020 tax returns (or their 2019 returns if the 2020 returns are not filed and processed yet).
Question 7: What do I have to do to get the advanced child tax credit payments?
Answer: Most families will not have to do anything. Once the child tax credit is determined the checks will be for half of that amount so that 50% will be paid out between July 15th and December 31st.
It’s estimated that 80% of eligible taxpayers have direct deposit information on file with the IRS. For families that do not they will receive checks or debit cards in the mail from the IRS. If the 15th falls on a weekend or holiday the payment will be issued the next business day.
Question 8: How is my advanced child tax credit amount determined?
Answer: It's pretty straight forward, he IRS will use information from your 2020 tax return not any fancy math equations. If a 2020 tax return has not been filed and processed information will be taken from your 2019 tax return.
Question 9: What if I’ve moved since I filed my last tax return or had a life change? How do I let the IRS know?
Answer: The IRS will be creating a portal for taxpayers to update their address and filing status if needed.
Question 10: Will I still be able to get the advanced child tax credit payments if I’m not required to file a tax return or I get government assistance?
Answer: Yes! The IRS will be creating a non-filer portal for taxpayers that had little to no income so that they can also get these advanced payments. As long as your income is below the threshold for the credit to be completely phased out you are eligible.
Note: Similar to the non-filer portal for the stimulus checks, this portal isn’t for you if you just didn’t file your tax return. This is for taxpayers who did not have a tax filing requirement due to being under the threshold for filing but are yet eligible to receive the advanced tax payments. If you have back taxes you need to file or pay reach out to my team at www.bowenstaxsolutions.com
Question 11: Will this make my tax refund smaller next year?
Answer: Possibly! If you fill out your W-4 and claim your children you will likely owe. By claiming your children in previous tax years, you were telling your employer to withhold less for taxes because you were claiming the $2,000 child tax credit at the end of the year. If you receive the advance payment for a 7-year-old child in the full amount of $250/month then you’ll only have $1,500 left vs the $2,000 your accustomed to at the end of the year.
Every taxpayer’s situation is going to be different. I agree with the Home Biz Tax Lady, LuSundra Everett “you should consult with your tax professional to see how the tax credit is going to affect you.” This should be done May to December and not during tax season when it’s going to be too late or your tax professional doesn’t have time to address your questions. You can check out what else she had to say about the Advanced Payments of the Child Tax Credit here: ARPA EXPANDED CHILD TAX CREDIT 2021 EXPLAINED.
Kiplinger also created a calculator to help you figure out how much you’ll received in advanced payments. Check it out here: Kiplinger 2021 Child Tax Credit Calculator
Note: If you don’t currently have a tax professional here are 3 things you should consider when choosing a the right tax professional for you: Three Things to Consider When Choosing a Tax Professional so You Don’t End Up in Tax Trouble
Question 12: Will we be taxed on these advanced child tax credit payments?
Answer: No, but it can reduce the amount of your tax refund if you aren’t properly prepared for it. Similar to the economic impact payments aka stimulus checks this is an advance that you are not being taxed on. The main difference here is that part of your credit may be claimed on your W-4 already so you may not have enough withheld from your wages if you work a W-2 job which will result in you not having enough tax withheld.
Question 13: What happens if I receive the wrong amount of the advanced child tax credit?
Answer: Unlike the stimulus checks, if you receive too much of the advanced child tax credit you will have to pay it back. So again, I am urging taxpayers to book a consultation with their tax professional to help them make the correct adjustments so they won’t be in for a surprise tax bill at the end of the year.
Question 14: Do we have to accept the advanced payments? Can we just send it back?
Answer: The IRS is going to create a portal for taxpayers that would like to opt out of receiving the advanced payments. This portal is not up yet as of May 25th, 2021. You can check back with the IRS website for updates at this link: Advanced Child Tax Credit Payments in 2021
I am advising my clients that do not need the funds to opt out of it if they have already claimed their children on their W-4 with their employer, but you should consult with your tax professional to see which decision is right for your tax situation.
Question 15: Will the credit change again next year?
Answer: As of right now the change is temporary and will affect only the 2021 tax year, although President Biden would like for the changes to the Child Tax Credit to last until 2025. Right now, we’ll have to wait and see what happens, but I’d plan on it not going past this year just to be safe.
Question 16: What if we never receive a payment?
Answer: If you do not receive any payments before December 31st, 2021 you will have to claim the credit on your 2021 tax return next Spring. The expansion of the child tax credit was written into law March 11th, giving the IRS only 4 months to figure out how to get these payments out in the midst of another extended tax season with many tax law changes. It is very possible that some taxpayers don’t receive their payments on time or at all during the year. Hopefully the IRS is able to rectify all issues before the end of the year.
As the IRS gives more guidance I will keep you updated so don't forget to like and subscribe. Be sure to share with all of your friends and family that have children and will be affected by these changes so can be informed as well! Will you opt in to receive or he advanced payments or will you opt out of them? Let me know in the comments!
Timalyn S. Bowens EA is America's Favorite EA and Louisville's Tax Expert that will work hard to find a legal solution that is customized for you! As an Enrolled Agent licensed through the Internal Revenue Service Timalyn is able to fight the IRS for taxpayers in all 50 states.
When you are facing questions regarding your personal or business taxes, working with a professional makes all the difference. At Bowens Tax Solutions, we serve our Louisville-area neighbors by providing the tax services and knowledge needed to succeed. We are here to assist you with your tax issues and preventative care. Visit our website at www.bowenstaxsolutions.com for more information.