The American Rescue Plan of 2021 includes dramatic one-year-only tax changes that may especially benefit parents of children under 18.
With sweeping changes to the Child Tax Credit, American parents may be eligible for advance payments of the Child Tax credit. That means parents may see monthly income hitting their bank accounts starting July 15th.
While most parents are “auto-enrolled” into the new advance child tax credit payments, some parents will have to take action. We explain how parents who have new children or changes in their tax situation can take advantage of these newly offered tax payments.
What Are The Expanded Child Tax Credits?
The American Rescue Plan expanded and changed Child Tax Credits. Taxpayers should only expect these changes to be in effect in 2021 (as of now). Some of the biggest changes include:
All parents with adjusted gross income (AGI) below $200,000 (single), or $400,000 (married filing jointly) are eligible for the “old” $2000 per child tax credit. After that, the credit starts to phase out.
However, the “enhanced” tax credit (the increase of $1,000 or $1,600) has stricter income criteria. It begins to phase out at lower thresholds. The thresholds depend on filing status. For each $1,000 a parent earns above the threshold, the enhanced credit decreases by $50.
- $75,000 — Single
- $112,500 — Head of Household
- $150,000 — Joint
Parents who are not eligible for the enhanced child tax credits will also not be eligible for the advance payments, even at reduced amounts.
Who Automatically Receives Advance Payments?
Parents who filed a tax return in 2020 and have no major changes to their tax situation, and are income-eligible for the tax payments, can expect to receive advance tax payments starting July 15th.
The advance tax payments will be directly deposited to the checking account on record with the IRS. Parents can expect to receive $300 each month for every child under age 6 (based on Dec 31, 2021 birthday) and $250 per month for children aged 6-17 (based on Dec. 31, 2021 birthday).
This means a parent with children ages 2,5, and 8 could expect to receive monthly payments of $850. Most tax filers will not need to take any action to begin receiving these advance payments on the 15th of each month.
Related: Top Tax Tips For New Families
Who Won’t Automatically Receive Advance Child Tax Credit Payments?
The IRS is working to enroll as many eligible families as possible into the system for advance child tax credit payments.
However, many parents who are technically eligible for advance payments will need to take action to receive payment. These are the groups that are most likely to be affected by changes.
How To Claim Advance Child Tax Credit Payments
Below we outline the actions each group listed above should take.
You Have A New Child In 2021
Families that give birth or adopt a child in 2021 are eligible for advance child tax credit payments. However, these families must register the new child (with a Social Security Number) through a new IRS web portal.
The IRS announced that the web portal will open up no later than July 1st of 2021. New parents should monitor this page for a link to the portal when it opens up.
Parents who don’t register in 2021 are still eligible to receive the full child tax credit. However, parents who don’t register for the advance payments in 2021 will not receive advance payments. Instead, they will receive the money as a tax refund when they file in 2022.
You Became A Primary Custodial Parent In 2021
The IRS assumes that all filing will stay the same from the year 2020. If you gained custody of a child in 2021, you will need to report that through the IRS portal. Monitor this page to see when the new portal opens up. Parents should try to make changes as early as possible to ensure they receive the check.
It is recommended that custodial and non-custodial parents coordinate to ensure that the appropriate parent receives the advance payments. Most people will be required to repay advance tax credit payments if they are received in error. The only exception to this rule is very low-income earners who may not be responsible for the full amount received.
You Did Not File A Tax Return For 2020
Individuals who were not required to file a tax return in 2020, will need to file a tax return to receive the advance child tax credit payments. Parents are urged to use the IRS free file system to file their taxes. This can be done through the IRS free file partners (including TurboTax and FreeTaxUSA).
If you had no income in 2020, you may find it difficult to use online tax software programs to help you file taxes. That should not hinder you from filing. Seek free professional help, so you can file a paper return. The IRS now allows people with $0 in income to file. This allows filers to opt into payments including the advance child tax credit payments.
Once parents file their return, the IRS will be able to send the advance payments via direct deposit. If you don’t have a bank account, there are plenty of fee-free online banks that will allow you to receive payments.
Your Income Is Expected To Fall In 2021
Parents who earned above certain thresholds in 2020 should not expect to receive advance tax credit payments in 2021. The exact formula for receiving payments depends on both income and the number of dependents parents have. The total advance tax credit falls by $50 for every $1000 parents earn above the threshold.
A married couple with one child (age 10) with an AGI of $170,000 in 2020 would not be eligible for advance credit payments. Based on their 2020 income, they are ineligible for the additional $1000 benefit provided by the American Rescue Plan. As a result, they are also ineligible for advance payments.
However, if this family is expected to earn less than $150,000 in 2021, they would become eligible for both the increased credit and the advance child tax credit payments.
At this time, the best guidance offered is that parents should be able to report material changes through the IRS portal. Monitor this page to see the link to the IRS change submission portal. The link to the portal will be live no later than July 1st of 2021.
Your Marital Status Changed
Whether you become married or divorced in 2021, a change in marital status is likely to affect whether you’re eligible for the advance payments. Starting no later than July, parents should be able to report changes to marital status through a specific IRS portal. Monitor this page on the IRS for information on when the portal opens and how to navigate to it.
Who Should Opt Out Of Payments In 2021?
Many parents who are eligible to receive advance payments will opt to do so. However, some parents may want to opt-out of the advance payments. The IRS will have a separate portal for those that wish to opt-out.
Parents who will be ineligible for advance payments in 2021, but receive them anyway, will generally need to repay the IRS at tax time in 2022. There are a few safe harbor rules for individuals with very low incomes. But the safest rule is that ineligible parents should opt-out of payments.
A couple reasons to consider opting out of the payments in 2021 include:
Parents who fall into either of these categories can monitor this page on the IRS website. By July 1st, the IRS will add a portal where parents can opt out of advance child tax credit payments.
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