In March of this year, the American Rescue Plan expanded the Child Tax Credit for 2021. For each child under age 6, the credit increased from $3,000 in 2020 to $3,600 in 2021. For each child ages 6 to 16, it has increased from $2,000 to $3,000. It also expanded the age restrictions to now include 17-year-olds as eligible for the credit.
The Plan also included changes that help families receive advance payments of the credit starting this summer. The IRS has started sending half of the total credit amount in advance monthly payments beginning July 15th. These payments will continue to be made on the 15th of each month unless the 15th falls on a weekend or holiday, in which case the payment will be made the proceeding business day. You will claim the other half of the credit when you file your 2021 income tax return in the spring of 2022. These changes apply to tax year 2021 only.
Taxpayers who claimed an eligible child on either their 2019 or 2020 income tax returns, or who claimed an eligible child when signing up for the Economic Impact Payments, are automatically enrolled in the advance payments. It is important to note that the credit amount you are receiving is an estimated amount calculated on prior year information. Thus, if your 2021 income or eligibility is different, you could potentially end up paying this credit back to the IRS on the filing of your 2021 tax return in the spring of 2022. The IRS has stated that they will continue to improve the accuracy of the estimated credit amounts, meaning the amount you receive each month may not remain consistent. We strongly encourage you to keep track of all payments you receive since this will need to be reported on your 2021 tax return.
In January 2022, the IRS will send you Letter 6419 to provide the total amount of advance Child Tax Credit payments that were disbursed to you during 2021. Please reconcile these amounts with your records, and keep this letter with your tax documents for reference when you and/or your tax professional prepare your 2021 income tax return. Because these credits are paid in advance, every dollar you receive will reduce the amount of Child Tax Credit you will claim on your 2021 tax return. This means that by accepting advance Child Tax Credit payments, the amount of your refund may be reduced or the amount of tax you owe may increase.
The IRS website does offer a link where you may opt out of receiving these monthly advanced payments. To stop advance payments, you must unenroll 3 days before the first Thursday of next month by 11:59 p.m. Eastern Time. If you miss the unenrollment deadline, you will receive the next scheduled advance payment until your request is processed. You do not need to unenroll each month. It may take up to seven calendar days to process your unenrollment request. Unenrolling applies to the individual only so if you are married and file a joint tax return, both spouses need to unenroll. The IRS recommends checking back after unenrolling to ensure your request was processed successfully.
You can access the IRS Child Tax Credit Update Portal here: https://www.irs.gov/credits-deductions/child-tax-credit-update-portal. Use this tool to: check if you’re enrolled to receive advance payments, unenroll to stop receiving advance payments, or provide updated bank account or home address information. If you do not have an existing IRS username or ID.me account, have your photo identification ready.
We will continue to keep you updated and informed as the tax law landscape continues to change. In the meantime, please feel free to contact our office with any questions or concerns you may have.