On Monday, May 17the, the IRS made announcements regarding the upcoming Refundable Child Tax Credit that was created as part of the American Rescue Plan. While not all of the details are available yet, the associated IRS.gov portals are scheduled to go live on July 1st, we do know some of what is to come.

88% of families with children will receive an automatic monthly payment, which is a pre-payment of their 2021 Child Tax Credit, with distributions to begin on July 15th and expected to continue on the 15th of each month; if the 15th is on a weekend or a holiday, the funds will be disbursed on the following Monday. For those who choose, the IRS is also offering the ability to opt-out and receive a lump-sum check or opt-out of the pre-payments entirely through the portal.

Eligibility for the Child Tax Credit is based on income, as illustrated in the table below:

CHILD TAX CREDIT 2021 QUALIFICATIONS

Who qualifies What the law says
Single filer An AGI of $75,000 or less to qualify for the full amount
Head of household An AGI of $112,500 or less to qualify for the full amount
Couple filing jointly An AGI of $150,000 or less to qualify for the full amount
Child age 5 and younger Credit for $3,600 each if parent/guardian meets above requirements
Child age 6-17 Credit for $3,000 each if parent/guardian meets above requirements
Nonfiler Will need to file a 2020 tax return to get the payment

 

For every $1,000 over the income limit, the credit phases out by $50.

The available cumulative credit is up to $3,600 for each child aged 0-5 years and up to $3,000 for each child aged 6-17 years old. You may also claim up to $500 for each child that is a full-time college student and is age 18-24 years old. Unless extended by future legislation, the child tax credit will revert to its 2020 amounts and rules in 2022 ($2,000 per child aged 0-16 years).

Other requirements also factor into eligibility:

  • The child you’re claiming must live with you for at least six months out of the year.
  • You and your child must be US citizens, unlike mixed-status households.
  • For married couples filing jointly, at least one spouse needs to have a Social Security number or an ITIN.
  • The child must also have a Social Security number — a child with only an ATIN won’t qualify. (This includes adopted children.)
  • Parents who share custody of a child cannot both get the tax credit.

The amount paid is based on your 2020 Tax Return (or 2019 if you have not yet filed your 2020 return), however any children that have been added to your family in the interim may be added to the pre-payment via the portal.

If you are confused about the division of payments, this is how they will arrive, according to cnet.com: For each qualifying child age 5 and younger, up to $1,800 will come in six $300 monthly payments this year. For each child between the ages of 6 and 17, up to $1,500 will come as $250 monthly payments six times in 2021. For both age groups, the rest of the payment will come with your 2021 tax refund, when you claim the remainder of the tax credit in 2022. Qualifying dependents between ages 18 and 24 count toward a one-time $500 payment.

Payments may be received via direct deposit, paper check, or debit card and even those who do not normally file taxes, but whose income qualifies for this credit are able to receive it. One of the portals being launched by the IRS will allow nonfilers provide information so that they can receive payments.

Some things you may want to consider with these changes of the Refundable Child Tax Credit are:

  • Whether you may want to adjust your withholding to reflect what may have a detrimental effect on your anticipated tax refund (for example, if you’ve budgeted to not pay the IRS come tax-time and may now possibly owe because of receiving the credit early)
  • If your income or circumstances have changed and may reduce or disqualify you from receiving the credit
  • You are concerned that the IRS may send you an overpayment that you will have to pay back

While the Refundable Child Tax Credit may seem similar to the stimulus payments sent out in 2020 and 2021, it is vastly different in that, while the IRS overlooked any overpayment or duplicate payment for the stimulus, any overpayment of the Child Tax Credit could result in having to pay the IRS back for the money received. This is also true in the circumstance of families of divorce or separation where the agreement includes each parents’ ability to claim a child every other year. Of course, there is an exemption included in the American Rescue Plan for a scenario of low-income parents. According to CNBC, Single filers with less than $40,000 in income qualify for the full “safe harbor” amount. (Heads of household and married couples filing a joint return qualify if their income is less than $50,000 and $60,000, respectively.)

If your income is over that threshold, you may still qualify for an exemption. Up to $2,000 per child would be shielded from repayment if the error is due to net changes in the number of qualifying children, according to the Congressional Research Service.

However, credit amounts exceeding $2,000 would still have to be repaid. The $2,000 protected amount gradually phases out as one’s income rises. Single filers with more than $80,000 of income (or, $100,000 for heads of household and $120,000 for joint filers) wouldn’t be shielded from any overpayment.

While the advance payments are scheduled to stop with the December 15th payment, the elevated credit amounts are expected to last until 2025 and President Biden is pushing to extend the monthly prepayments past the end of the year.