In July, the IRS began sending advanced payments of the Child Tax Credit (CTC) to millions of U.S. households. Whether you received a payment or were expecting a payment and didn’t get it, here is some key information about the CTC and how the advanced payments work.
What is the Child Tax Credit?
Historically, the CTC gave taxpayers with eligible dependents under the age of 17 a tax credit worth up to $2,000 per child. To qualify for the full credit, the taxpayer’s adjusted gross income had to be under $200,000, or under $400,000 for married taxpayers filing jointly.
The American Rescue Plan made several changes to the Child Tax Credit for 2021, including:
- Increasing the maximum Child Tax Credit to $3,000 per child aged six and older, and $3,600 for children under age six
- Making the Child Tax Credit available for 17-year-old dependents
- Making it fully refundable (previously, only up to $1,400 of the CTC was refundable)
- Allowing eligible families to receive half of the credit in advance during the last half of 2021
Only taxpayers with income under a certain threshold qualify for the increased credit amount. To qualify for the full amount, the taxpayer’s modified adjusted gross income (MAGI) must be:
- $75,000 for Single filers
- $112,500 for Heads of Household
- $150,000 for Married Filing Jointly
The Congressional Research Services estimates that 96% of families with children can receive the child tax credit, but not all families qualify. Above a certain income threshold, the amount of the credit begins to phase out. Once your MAGI reaches $200,000 ($400,000 if married filing jointly), the CTC is reduced by $50 for each $1,000 over the limit.
Advanced Child Tax Credit Payments
One of the most highly anticipated (and poorly understood) aspects of the expanded Child Tax Credit is the advanced payments.
Eligible families will receive up to $300 monthly for each eligible child under age six and up to $250 per month for other eligible children. The payments began on July 15, 2021, after which they’re scheduled to go out on the 15th of each month through the end of the year. Parents receive the monthly payments through direct deposit, debit card, or paper check.
If you don’t need or want the advanced payments, you have the option of unenrolling by visiting the IRS’s . For many parents, opting out is likely a good move.
That’s because the IRS bases payments on the taxpayer’s most recently filed tax return. Unlike stimulus payments, these monthly payments aren’t “free money” — they’re an advance of a tax credit available on your 2021 tax return.
If you qualified for the Child Tax Credit in 2019 or 2020 but don’t qualify — or qualify for a smaller credit — based on your 2021 income, you’ll have to pay back the excess payments when you file your 2021 tax return.
Some common reasons for opting out of the advanced payments include:
- You anticipate earning more income in 2021 than you did in 2020
- You have significant income that isn’t subject to withholding, such as self-employment income or capital gains
- You’re not claiming a child as a dependent because they aged out of eligibility
- You’re not claiming a child as a dependent because you and another taxpayer alternate claiming them as a dependent each year
If you’ve already started receiving payments, you can opt-out of future payments via the portal. The deadline to opt-out or make changes to your bank account information is three days before the first Thursday of the month by 11:59 p.m. ET.
To learn more about the Child Tax Credit or get help calculating your potential credit amount, please reach out to MST CPAs. We can help you determine if opting out of the advanced payments is the best move for you.