- The Child Tax Credit has been enhanced (more per child, more children qualify) for 2021.
- The IRS is going to be sending checks (or direct deposits) monthly starting in July for up to half of the credit they think you’re eligible to receive based on prior year tax returns.
- The actual credit will be reconciled on your 2021 taxes. If you receive payments you shouldn’t have, your refund will be reduced or the amount you owe will be greater (i.e. you have to pay the IRS back). If you didn’t receive payments you should have, you’ll get the credit when you file.
- The easiest way to deal with this, by far, is to do nothing. Let the IRS pay who they think they should pay and reconcile it all at tax time. But, you can take action if you prefer a different result.
One of the many tax law changes coming out of the American Rescue Plan Act (ARPA), passed earlier this year, is an enhanced Child Tax Credit for 2021. Instead of $2k per child under 17, you’ll now get $3k per child under 18 or $3600 for each child under 6, subject to income phaseouts. The extra $1k or $1600 starts to phase out at incomes over $75k Single, $112,500 HoH, and $150k MFJ. The phaseout of the original $2k remains the same as in previous years at $200k Single/HoH and $400k MFJ. In addition to the larger credit and more children qualifying, Congress worded the law change such that the IRS has to pay half of the expected credit to each family during the tax year. That’s right, more checks or direct deposits on the way for many families.
Those payments will begin in July and continue monthly for the remainder of 2021. The IRS will send half of their estimated amount that you are due to receive via those six monthly payments. How will they estimate what you’re due to receive? They’ll use your income and number of qualifying children as shown on your 2020 tax return (or 2019 if you haven’t filed 2020 yet) to project your Child Tax Credit under the new law. In January 2022, if you received any advanced Child Tax Credit payments, you’ll receive Letter 6419 from the IRS. This is a new input to your tax documents and will be used to reconcile what you received vs. what you qualify for based on your 2021 actual situation (income and qualifying children). If the IRS didn’t send you enough money, the remaining amount will be added as a credit on your 20201 return. But, if the IRS sent you too much, in most cases, you will have to pay that back via an additional tax that will reduce your refund or increase the amount you owe for 2021 when you file.
If you don’t want the advance payments, or you want to update your information so that the IRS can more accurately project what your 2021 Child Tax Credit will be (income, children, etc.), you can use the IRS’s new Child Tax Credit Update Portal to do so. Be aware that currently, you can only opt out through that site. It will be updated later this year to allow you to make changes to your situation without opting out. At that point, you’ll also be able to update your direct deposit information or your mailing address for a paper check. Be aware that this is a brand new IRS tool that was rushed out to meet the law’s requirements, during a pandemic, with short-staffing. I’m not saying the IRS is incapable of doing this right, but history is not on their side, even during normal times. Additionally, identity verification is required to use the Update Portal. You’ll either need an existing IRS account, or you’ll have to use sign in via ID.me, an independent identity verification service that the IRS uses to make sure you’re you. Setting up an IRS account has historically been difficult for some people, leading to snail mail letters in order to complete the registration. I haven’t gone through the ID.me process myself, but I’ve heard that it works, though it’s exceptionally tedious. Also note that if you’re married, both spouses will have to opt out of advanced Child Tax Credit payments in order to make sure you receive nothing. The IRS says that “unenrolling applies to the individual only.” If one spouse unenrolls and the other doesn’t, they will receive half the joint payment they were supposed to receive with their spouse.
The IRS has also launched a tool they’re calling Advance Child Tax Credit Eligibility Assistant. This one doesn’t require any registration. It just allows you to enter information from your 2020 or 2019 tax return so that you can see what they are calculating and if you’ll be receiving payments if you don’t opt out or adjust your data.
The bottom line: unless you’re extremely bothered by the chance of having to repay advanced payments at the time of filing, I recommend that you just ignore this whole process. If the IRS sends you money, consider it a loan that might have to be repaid and just make note that you’ll need your Letter 6419 that reports the total in order to file your 2021 taxes. Using that letter, your tax preparer will reconcile the payments received with the actual Child Tax Credit and everything will balance out when you file your 2021 taxes.
For more information, please see the IRS’s Resources and Guidance page on this topic, which includes FAQs, User Guides, YouTube Videos, and News Releases.