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

One aspect of the American Rescue Plan that child poverty advocates have applauded is the major redesign of the Child Tax Credit for the 2021 fiscal year. The changes made to the credit now include monthly direct payments, expanded eligibility, and the quantity received by the majority of families. 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 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. The first payment will be sent on the 15th of July. Families can expect six monthly installments on the 15th of each month through December, except in August, when it will be sent on the 13th.

These six payments represent half of the credit's value, the rest of which will be claimed next year during tax filing season. 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 their tax return next spring.

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

The IRS has launched two online portals for parents to use which, can be found on the Advance Child Tax Credit Payments in 2021. The tax authority has stated that more functionality will be added to these portals in the coming weeks.

The first, called the Child Tax Credit Eligibility Assistant, allows parents to determine if they are eligible for advance payments from the enhanced credit.

The second, Child Tax Credit Update Portal, 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?

Before the changes were made to the structure of the Child Tax Credit under the American Rescue Plan, it had been adjusted in 2017 as a part of 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 portion of the credit, a filer had to show earned income of more than $2,500. 

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 the 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 their part, want to make the changes to 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 nonrefundable 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?

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 and care for the dependent for at least half of the calendar 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 are not normally required to file taxes. The agency also recommends using direct deposit to receive their refund and the advance payments faster.

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.