A summer perk is coming to millions of American families. Under the American Rescue Plan Act that passed in March of 2021, the Child Tax Credit (CTC) amount has increased. Additionally, the federal government will be prepaying a portion of this credit in 2021. The IRS has announced that the first direct monthly payments of the expanded CTC will be made on July 15, 2021.

Taxpayers who have filed their 2020 tax returns electronically with direct deposit can expect to see those payments appear automatically in their bank accounts on the 15th of each month from July through December (unless the 15th falls on a weekend or holiday). The IRS will mail paper checks or debit cards to the address on file for taxpayers who don’t use direct deposit.

How Much Is the Credit?

The American Rescue Plan (ARP) made a number of enhancements to the CTC for 2021. 

First, the ARP increased the maximum credit from $2,000 to:

  • $3,600 per qualifying child for children under the age of 6 
  • $3,000 per qualifying child for children ages 6 to 17

The age of the qualifying child will be determined as of December 31, 2021. Under the 2020 rules, a child who turned 17 during the year wasn’t eligible for a child tax credit. Under the expanded credit, as long as your child hasn’t turned 18 before December 31, 2021, they may qualify for an expanded credit.

Another change is that the expanded credit is now fully refundable, allowing taxpayers to take advantage of it even if they don’t have earned income or owe income taxes. As mentioned above, the ARP also made a portion of the credit available to families through monthly advance payments beginning on July 15th. These automatic payments will cover up to 50% of the anticipated credit, and taxpayers will claim the rest on the 2021 tax return.

Eligible families will receive monthly payments of:

  • Up to $300 per month for each child under age 6 (up to $1,800 total advanced credit)
  • Up to $250 per month for each child between ages 6 and 17 (up to $1,500 total advanced credit)

Advance payments will be estimated from information included in eligible taxpayers’ 2020 tax returns. In cases where 2020 returns are not filed and processed yet, the IRS will use taxpayers’ 2019 returns.

Who Qualifies?

Advance payments of the 2021 CTC will be made to eligible taxpayers who have a primary home in the United States for more than half the year. 

The full amount of the tax credit will go to taxpayers with adjusted gross income under the following amounts:

  • $150,000 for married taxpayers filing jointly and qualifying widows or widowers 
  • $112,500 for heads of household
  • $75,000 for single or married filing separately filers.

Next Steps

If you want to receive advance payments of the CTC and have already filed your 2020 tax return, then no further action is necessary. If you have not filed your 2020 return, file as soon as possible to make sure you receive the appropriate amount of the CTC. The IRS encourages filing electronically with direct deposit to ensure the fast and secure delivery of CTC payments. 

The IRS has announced it will allow taxpayers to decline to receive the advance payments of the CTC but has not yet announced the method that taxpayers would need to take. Additionally, the IRS will be providing details on how to update information about changes in 2021 income, filing status, or the number of qualifying children. All those criteria will impact the maximum CTC that you may claim on your 2021 return. Therefore, if you anticipate changes on your 2021 return versus what was reported on your 2020 return, you may need to update the IRS accordingly.

You may also want to review what your CTC impact was on your 2020 return. If you took the maximum $2,000 per qualifying child on your 2020 return, the credit you take on your 2021 return might be slightly less. While the amount of the CTC increases in 2021, with 50% of that increased CTC being prepaid, the overall remaining credit to take on your 2021 return will be lower.

Check back with us for updates as the IRS continues to announce information regarding the ARP and the enhanced Child Tax Credit. To learn more about the benefits available and the impact on your personal tax situation as a result of the ARP, please contact your CRI tax advisor.