What Taxpayers Need to Know About the Child Tax Credit

As part of the American Rescue Plan Act of 2021, the IRS increased the amount of the Child Tax Credit and plans to issue up to 50% of the credit in the form of monthly advanced payments beginning July 15, 2021. Taxpayers may claim the remaining credit when they file their 2021 income tax return.

Who Qualifies for the Credit?

Taxpayers are entitled to the full amount of the credit if their modified adjusted income is less than $75,000 for single filers, $150,000 for married filing jointly filers, and $112,500 for head of household filers. The Child Tax Credit begins to phase out once income rises above these thresholds.

Taxpayers at higher income levels (i.e. $400,000 or less for married filing jointly, or $200,000 or less for other filers) will receive the same amount of Child Tax Credit as prior law (generally $2,000 per qualifying child). These filers may choose to receive advance payments as well.

How is the Credit Amount Calculated?

The amount of the credit is based on income, age of qualifying dependent children, and other factors.

  • The credit for qualifying dependent children ages five and under can be as high as $3,600 (up to $300/month in advance payments).
  • The credit for qualifying dependent children ages six up to seventeen can be as high as $3,000 (up to $250/month in advance payments).

In order for the IRS to calculate advance payments of the credit, taxpayers and their spouse (if filed jointly) must have:

  • filed a 2019 or 2020 tax return and claimed the Child Tax Credit on their return, OR
  • given the IRS information in 2020 using the non-filer tool when claiming the Economic Impact Payment, AND
  • maintained a principal residence in the United States for more than half the year or file a joint return with a spouse who also maintained a principal residence in the US for more than half the year, AND
  • a qualifying child who is under age 18 at the end of 2021 who has a valid Social Security Number, AND
  • made less than certain income limits.

The IRS will use this information to calculate eligibility. Taxpayers generally will not be required to do anything to receive advanced payments.

It is important to note that because the IRS will calculate advance payments based on either the 2019 or 2020 tax return, it is possible that the amount of advanced payments issued will be more than the actual credit taxpayers will be entitled to when they file their 2021 tax returns. For example, a child who qualified on the 2019 or 2020 tax return may have “aged out” for the 2021 tax return and hence, not qualify for the credit on the 2021 tax return. Taxpayers, in general, will have to reconcile the advance payment amount with the actual credit amount as calculated on their 2021 tax return and increase taxable income by the excess of the advance payment amount over the actual credit allowed.

Because every situation is different, it is important to consult with your AAFCPAs tax advisor and determine whether receiving advanced tax payments is right for you.

How to Facilitate Your Child Tax Credit

To facilitate Child Tax Credit advance payments, the IRS launched a Child Tax Credit Update Portal.

Taxpayers may use the portal to:

  1. View eligibility
  2. View advanced payments
  3. Check on the status of advanced payments
  4. Unenroll from advanced payments
  5. Make changes to information, such as filing status or number of children

To use the portal, taxpayers will need to log in under an IRS account or a ID.me account.

To set up an IRS Online Services Account, taxpayers will need the following:

  • Email address
  • Social Security Number or Individual Tax Identification Number
  • Tax filing status and mailing address
  • One of the following financial account numbers linked to your name:
    • Credit card – last 8 digits (no American Express, debit or corporate cards)
    • Student loan (except loans issued by Nelnet as the IRS cannot verify those accounts)
    • Mortgage or home equity loan
    • Auto loan
  • Mobile phone linked to your name (or the ability to receive an activation code by mail)

If you do not want to receive Child Tax Credit advance payments, you must log into the portal before July 15, 2021 to unenroll. You may also choose to receive some payments and unenroll from advance payments later.

If you have questions, please contact Greta Whelan at 774.512.4113, gwhelan@nullaafcpa.com; Dana Marks, CPA at 774.512.4044, dmarks@nullaafcpa.com; or your AAFCPAs Tax Partner.