The American Rescue Plan Act (ARPA) of 2021 expands the Child Tax Credit (CTC) for Tax Years 2021, which means the credit for qualifying children is fully refundable and taxpayers can benefit from the credit even if you do not have earned income or don’t owe any income taxes. The credit will also include children who turn age 17 in 2021.
The total credit will be dependent upon the number of children in the family, the ages of children and the family’s adjusted gross income.
The IRS will automatically issue advance payments to eligible families starting in July 2021, which will be deposited into bank accounts on the 15th of each month from July – December. If the IRS has no bank account information, checks or debit cards will be issued. For each qualifying child age 5 and younger, up to $1,800 will be issued in six $300 monthly payments this year. For each child between the ages of 6 and 17, up to $1,500 will be issued as $250 monthly payments six times in 2021. For both age groups, the remainder of the eligible credit will reported with the filing of the 2021 tax return.
Advanced payments though will be reduced for incomes over $150,000 for married filing joint, $112,500 for heads of household and $75,000 for all other taxpayers. Payments will be based on taxpayer’s 2020 return or 2019 return if 2020 return has not been filed yet.
The IRS will open a child tax credit portal by July 1st which will allow taxpayers to manage parts of the payment such as making an election to report the full credit on their 2021 tax return (taxpayers are not obligated to receive monthly payments) or update their 2021 information if there has been changes from the prior year. For example if a new child was born in 2021 which would not have been reflected on the 2020 return, a child is no longer considered an eligible dependent or a taxpayer’s income has changed from 2020 to 2021 which may affect eligibility. Taxpayers should consider accessing the portal if they believe their tax situation may or will change for 2021 from what was reflected on their 2020 return based on some of the previous examples, as this may have an impact on the Child Tax Credit for Tax Year 2021. Note that if the advanced payments received by taxpayers during 2021 exceeds the calculated Child Tax Credit amount reported on the 2021 tax return, the overpayment will need to be given back to the Service. Taxpayers will need to be cognizant of this possible situation as they could owe additional money when filing the 2021 tax return.