Advance Child Tax Credit
Many American families began receiving Advance Child
Tax Credit (ACTC) payments on July 15. Here’s what you
need to know about the changes to the child tax credit,
choices you can make, and planning for 2021 taxes.
The ACTC is an advance payment of half of the
expanded child tax credit (CTC) made available under
the American Rescue Plan. The remainder of the credit
gets settled on 2021 tax returns due in 2022. Although
there are proposals to extend it, the expanded CTC is
currently only available in 2021.
To qualify for advance Child Tax Credit payments, you
(and your spouse, if you filed a joint return) must
have:
• Filed a 2019 or 2020 tax return and claimed the
Child Tax Credit on the return; or
• Given the IRS your information in 2020 to
receive the Economic Impact Payment using
the Non-Filers: Enter Payment Info Here tool;
and
• A main home in the United States for more than
half the year (the 50 states and the District of
Columbia) or file a joint return with a spouse
who has a main home in the United States for
more than half the year; and
• A qualifying child who is under age 18 at the
end of 2021 and who has a valid Social Security
number; and
• Made less than certain income limits: taxpayers
must have 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.
For most people, modified AGI is the amount shown on
Line 11 of their 2020 Form 1040 or 1040-SR. Above
these income limits, the extra amount over 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.
For Most Qualified Taxpayers, the ACTC is Automatic:
Income-eligible parents who filed tax returns for 2019
or 2020 (whichever is the latest year that the IRS has on
file) will receive ACTC payments automatically. For
others, the IRS has a non-filer sign up tool on its website
to report qualifying children born before 2021. This
group includes low-income families who did not earn
enough to have to file taxes.
Payment Dates are Fixed: The six scheduled payment
dates for ACTC benefits payable in 2021 are July 15,
August 15, September 15, October 15, November 15,
and December 15. Most payments will be made through
direct deposit to a parent’s financial account. The
purpose of advance payments- versus simply getting the
expanded tax credit via an income tax return next year
is to get money in the hands of eligible families sooner
for COVID-19 relief.
Payment Amounts are Fixed: The “regular” child tax
credit is $2,000 per eligible child age 16 and younger
and $1,400 is refundable. A refundable tax credit means
that an individual could get even more back as a tax
refund than what they owe for taxes. For 2021 only, the
expanded CTC increases to $3,000 per child age 6 to 17
and $3,600 for children under age 6 and the credit is
fully refundable. ACTC payment amounts from July
through December 2021 are $250 per month (children
age 6-17) and $300 per month (age 5 and younger).
Useful Resources: The IRS recently unveiled its Child Tax
Credit Update Portal to assist parents with questions
about the ACTC payments. At this portal, users can view
their eligibility and advance payments and unenroll
from receiving advance payments.
The IRS is Contacting Eligible Taxpayers: The IRS has
sent two letters to approximately 36 million eligible
families, one to notify them about their eligibility for
ACTC payments and the second to notify them of their
estimated monthly payment. Taxpayers should notify
the IRS immediately to update necessary information
such as a change in address, bank account, or number
of eligible children.
Taxpayers Could Be Overpaid: Because the IRS is using
past tax year data for a current tax year credit, there
will be some overpayments. For example, taxpayers
who found a higher-paying job, got a pay raise or bonus,
added a spouse to the labor force, or had investment
capital gains or any other extra taxable income in 2021.
They could find themselves over the income limits that
are noted above. Unlike excess stimulus payments that
were forgiven, ACTC overpayments will result in a
smaller refund or an extra tax bill in 2022.
Single-Parenting Makes Things Complicated: Some
divorced or never-married parents alternate the child
tax credit between parents with one parent taking it in
odd years and the other in even years. The IRS,
however, does not know this and will send ACTC
payments to the parent listed on the last tax return that
it has on file. Co-parenting couples need to deal with
this (as well as the increased payment available in 2021)
based on the specifics of their financial agreements.
There are Several Good Reasons to Opt-Out: While
ACTC payments are available in 2021, they are not
required. Some taxpayers may want to opt out of
advance payments and receive whatever expanded CTC
they may be due when they file their 2021 tax return in
2022. Good candidates for opting out of ACTC payments
now and waiting to figure out credit amounts in 2022
are taxpayers in the following categories:
• Those who do not normally receive a refund
and do not want to owe a larger amount than
usual.
• Those who are unsure of their total 2021
income, such as freelancers and potential job
changers.
• Those who prefer one large tax refund payment
instead of a series of smaller monthly
payments.
• Those who are not sure if they will have a
dependent child under age 18 living with them
for at least 6 months in 2021. This could include
foster parents or family members caring for a
minor.
There are Deadlines to Opt-Out: The deadline to optout or stop an upcoming ACTC payment for each month
is posted below:
• Friday, August 13 – opt out by August 2
• Wednesday, September 15 – opt out by August
30
• Friday, October 15 – opt out by Oct. 4
• Monday, November 15 – opt out by November 1
• Wednesday, December 15 – opt out by
November 29
Unenrollment from advance payments is done using the
IRS portal and clicking on “Unenroll from Advance
Payments.”
Save Half “Just in Case” Estimating taxes you may owe
is always tricky, but never more so in times of economic
turmoil such as what Americans have experienced in
2020-21. Many tax experts recommend a “save half,
spend half” strategy for ACTC payments just in case
your income or number of dependent children changes
during 2021. If you receive more than you are due for
ACTC, you may need to repay to the IRS some or all of
that excess payment. In January 2022, the IRS will send
you Letter 6419 to provide the total amount of advance
Child Tax Credit payments that were sent to you during
2021 for your tax records. You may need to refer to this
letter when you file your 2021 tax return during the
2022 tax filing season. If it turns out you don’t owe
more to the IRS, you will have extra savings set aside to
use as needed.
