New monthly child tax credits will start hitting bank accounts on July 15. Some will see monthly payments of up to $300 per child.
It’s part of the American Rescue Plan signed into law in March. It increases the overall child tax credit, expands it to include children turning 17 this year and adds another annual $600 benefit per child under six years old.
The IRS said the payments will come to you the same way you received your tax refund or stimulus payments. For most people, that’s through direct deposit into their bank accounts.
Advance child tax credit isn’t the same as a stimulus payment
Taxpayers with kids usually see the child tax credit when they file their income taxes. The new, larger child tax credit will be distributed, partly, in monthly payments as an advance credit. Half will be distributed in monthly payments between July through December. You can claim the other half of the credit when you file your 2021 federal income tax return.
Brent Turner, CEO of Liberty Tax, said it’s important to understand the payments are not treated like stimulus checks. The child tax credit is an advance payment of a credit that already exists. Though the credit amount has increased, taking advance payments will impact your federal income tax refund next year.
“If you're going to get a $3,000 credit for your child, but you're getting $1,500 in that credit upfront or in these advance payments, what's going to happen is they're going to take the $1,500 that's already been paid to you and deduct it from your tax refund,” explained Turner.
“A lot of our taxpayers actually need that money today. So, it's a great way of managing your budget, managing your bills now,” added Turner. “Just realize that it is going to impact your refund for the next season.”
Turner said if you prefer to get a larger tax refund when you file your 2021 income tax return, consider opting out of the advance payments and taking the full credit later. Or, if you use the child tax credit to help offset what you may owe the IRS, you may also want to look into opting out of advance payments.
The IRS is using information in your 2020 federal income tax return or your 2019 return, if that’s the most recent one processed, to estimate your advance child tax credit payments. If your marital status changed since then, Turner said you want to ensure you still qualify for the child tax credit payments. If it turns out you didn’t qualify in 2021, you’ll have to settle up with the IRS later.
“If you go through a divorce, your marital status changes and somebody else is going to be able to claim that child on their tax return, you don't want to take the advance payment of the child tax credit because it will affect your refund and you may wind up owing money,” said Turner.
That’s also true if your income changed since the last time the IRS processed a tax return for you.
If you’re not sure you’re eligible for the credit for the 2021 tax year and worry about having to pay back overpayments, you can opt-out of advance monthly payments and claim the full credit when you file your income tax return.
“If you've got massive changes to your income, you may not want to take the child tax credit upfront. You may want to wait to see how it affects you at the end of the year,” explained Turner.
There is an exception to repaying an overpayment for a single filer who makes less than $40,000 a year or couples who make less than $60,000 a year.
If you determine you’d like to opt-out of the advance payments, Turner said it’s likely too late to stop the first monthly payment. However, the IRS opened a portal that will allow you to opt-out of additional payments here.
You can also use the portal to tell the IRS about any changes that could impact your eligibility.
“You can always go in and opt-out of receiving additional payments,” said Turner. “If you haven't opted out and you choose to do that at a later point in time, you can do that after the first payment.”
Who qualifies for the payments? It depends on your income and the age of children
You may have received a letter from the IRS about the advance payments. You can use this IRS tool to determine if you’re eligible.
Generally, the IRS said families will receive up to $3,000 per child between the ages of six and 17 for the 2021 tax year or $3,600 per child under six.
Your income is also factored in.
The IRS says you’ll receive the maximum enhanced credit if your adjusted gross income is $75,000 a year or less for a single filer, $112,500 or less for heads of household. Joint filers or qualifying widows or widowers who make $150,000 or less will also receive the maximum enhanced child tax credit.
The amount phases out for higher incomes.
For example, if you’re married with a combined income of $100,000 a year and you have a toddler, you would get a $3,600 child tax credit for 2021. The monthly payments would add up to 300 dollars per month for six months. The rest will be factored in as a credit on your 2021 federal income tax return.
If you didn’t file income taxes in the last two years and you didn’t register for stimulus payments, you can use the non-filer signup tool here.
The enhanced child tax credit is temporary – for the 2021 tax year.
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