$3,000/$3,600 Child Tax Credit: is IRS contacting families who will receive it? if so, how?

The American Rescue Plan included a major redesign of the Child Tax Credit for the 2021 fiscal year which will include monthly direct payments to parents that choose to receive it in advance. The IRS announced that over 36 million families should be expecting a letter in the mail to inform them about the enhanced tax credit.

The letters will be going to families who, upon reviewing information from either their 2020 or 2019 tax return or who used the IRS Non-Filers tool last year to claim their $1,200 stimulus check, the agency deemed might be eligible for the enhanced credit. The IRS will send out a second letter specifically to families that are eligible for the advanced payments on the credit beginning 15 July.

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That letter will tell each family how much the agency estimates those payments will be. Six monthly installments on half the credit will be sent the 15th of every month from July through December, except in August when it will be sent on the 13th. The remainder of the credit can be claimed on a taxpayer’s 2021 tax return. That is unless a family wishes to opt out of the monthly payments and receive the whole of the credit due to them when they file next their tax return next spring.

The IRS is setting up two online portals for the 2021 Child Tax Credit

The IRS will have two online portals up and running for parents to use in the next few weeks which, when available, can be found on the Advance Child Tax Credit Payments in 2021 website when they are available. One will be interactive, allowing parents to determine if they are eligible for advance payments from the enhanced credit.

The second, for the time being, will allow those who were determined to be eligible for the advance on the credit to opt out of the monthly payments and claim the tax credit as a lump sum on their 2021 tax return. Later on this year, parents will be able to check the status of their payments and adjust their account, updating information to make them eligible for a larger or smaller payment. At that time the online tool will also be available in Spanish.

What is the Child Tax Credit?

The Child Tax Credit was last adjusted in 2017 with the Tax Cut and Jobs Act. This saw the credit expanded to $2,000 per child, but only $1,400 of that was refundable. Furthermore, in order to claim the refundable portioof the credit a filer had to show earned income of more than $2,500. Above that the taxpayer could claim only a portion of the refundable part of the credit until their income allowed for the whole of the refundable portion.

Now that the earnings floor has been removed and the credit is fully refundable, it is expected that childhood poverty could be reduced by half in 2021. But the measure will be temporary with the changes set to expire at the end of year. President Biden has said that he wants to extend the expansion until 2025, when the changes made in 2017 will expire as well, dropping the credit back to $1,000. The hope is that the enhanced credit will prove so popular that voters will want the changes to be made permanent. Congressional Democrats, for they part, want to make the credit permanent starting this year as part of the American Families Plan.

How much will families receive per child?

Eligible families can receive up to $3,000 per child between the ages of 6 and 17 at the end of 2021. Each child under age 6 at the end of 2021 could qualify for up to $3,600. The credit is fully refundable so if a family owes less than the amount of the credit, they will receive the excess as a tax refund.

Under the American Rescue Plan taxpayers can still claim a non-refundable credit of up to $500 toward the child tax credit for 18-year-old dependents and dependents between the age of 19 and 24 who are attending college full-time. There won’t be an advanced payment on this credit.

Who is eligible to receive the enhanced Child Tax Credit?

Under the new legislation, individuals will qualify for the full enhanced Child Tax Credit if their annual earnings are below $75,000; or a joint income of up to $150,000 for married couples, widows and widowers and $112,500 for heads of household. If your earnings are above those limits, you will receive a reduced credit which gradually phases out $50 for every $1,000 over the threshold.

The IRS will determine eligibility based on 2020 tax returns, or 2019 returns if a taxpayer’s 2020 tax return hasn’t been filed and processed yet. To be eligible a taxpayer must have their main home in the US for more than half the year. The IRS urges taxpayers with children to file a 2020 tax return as soon as possible, if they haven’t already, to get the correct amount from the tax credit. This includes those with no income who are eligible to receive the credit but not normally required to file taxes. The agency also recommends using direct deposit to receive their refund and the advance payments faster.

How will the Child Tax Credit be paid?

Families could receive a monthly payment of $300 per child under 6 and/or $250 per child under 18 at the end of the year. The IRS confirmed that the payments will begin 15 July and be paid on the 15th of every month through December, “unless the 15th falls on a weekend or holiday, allowing families who receive the credit by direct deposit to plan their budgets around receipt of the benefit.”

The monthly payments will cover half the total credit and next year when taxpayers file they can claim the remainder of the credit on their 2021 tax return. However, if a family wishes they can opt out of the advance monthly payments and claim the whole credit as a lump sum when they file next year. The IRS has said that two online portals will be up and running no later than 1 July 2021.

One portal will allow parents to check their eligibility for the advance payments. The other portal will let parents choose to opt out of receiving the direct payments, and later in the year update their family or financial circumstances to receive a larger payment or smaller to avoid having to repay and overpayments on the credit. As more information becomes available the agency will post updates on the Advance Child Tax Credit Payments in 2021 website.

Why you might have to return the advance payments

With advance payments on last year’s information, or even from 2019, there are sure to be some overpayments. Although the legislation creates a “safe harbor” for lower- and moderate-income taxpayers, above a threshold taxpayers would need to repay any overpayments they received.

Households with adjusted gross income at or below $40,000 on a single return, $50,000 on a head-of-household return and $60,000 on a joint return won't have to repay any overpayments on the Child Tax Credit that they receive. However, those households making at or above $80,000, $100,000 and $120,000, respectively, will need to repay the entire amount of overpayment. For households with earnings in between these thresholds, they will need to repay a portion of any overpayments received.