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August 25, 2021

NTA Blog: Advance Child Tax Credit: What You Should Know: Part I

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The $1.9 trillion American Rescue Plan Act of 2021 (ARPA) increases the Child Tax Credit (CTC) amount for 2021 from $2,000 up to $3,000; increases up to $3,600 for qualifying children under the age of six; and expands the age of a qualifying child to children who have not turned 18 years old. ARPA also allows half of the credit to be distributed through advance payments of the CTC in monthly allotments from July to December. The legislation made the credit fully refundable for many taxpayers for 2021, allowing more low-income households to qualify for it.

In fact, one study found that the CTC expansion along with three other relief sections in ARPA (expansion of unemployment benefits and the Supplemental Nutrition Assistance Program, and Recovery Rebate Credit payments) could reduce the projected poverty level in 2021 by more than one-third. Another study determined this expansion will particularly improve participation in CTC among families of color. Yet another report shows that while 84 percent of families with children received CTC before the expansion, 96 percent will receive CTC after the ARPA expansions. To date, more than $30 billion were paid to families that include roughly 61 million eligible children in the second monthly payment. The number of August payments increased for an additional 1.6 million children, but some taxpayers with Individual Taxpayer Identification Numbers (ITINs) are now just receiving their July payment, and over four million taxpayers are receiving a paper check rather than a direct deposit of the monthly credit.

Part I of this series addresses ten things that individuals should know about the Advance Child Tax Credit (AdvCTC), including qualification, reasons someone might want to unenroll from receiving monthly payments, and first-time parents. Part II will focus on issues experienced by taxpayers with ITINs and the issuance of paper checks versus direct deposits for the August payment. Part III will explain how AdvCTC tools work, including ID.me, and covers struggles some taxpayers are facing in receiving their AdvCTC.

Overview: Ten Things to Know About AdvCTC

  • To qualify for the AdvCTC, parents must:
    • Have at least one child under 18 years old who will not turn 18 before January 1, 2022;
    • Make less than $150,000 if filing jointly, or less than $112,500 for unmarried single parents. Households exceeding those limits can receive smaller amounts;
    • Have a main home in the United States for at least six months; and
    • Live with the child claimed as a dependent for at least half the year, although special rules apply to a child’s birth, death, or temporary absence during the year.
  • Taxpayers do not need to do anything to receive the monthly payment if they are eligible. However, if they have not filed their 2020 tax return or 2019 tax return, they must file a tax return claiming the CTC or provide their information on the IRS’s online Child Tax Credit Non-Filer Sign-Up tool. This tool allows a taxpayer whose income in 2020 was less than $12,400 ($18,650 if head of household, or $24,800 if married) to file a simplified 2020 tax return, register for AdvCTC payments and the third Economic Impact Payment, and claim the 2020 Recovery Rebate Credit. Taxpayers do not need income to receive AdvCTC, the Economic Impact Payment, or Recovery Rebate Credit. However, taxpayers with earned income may benefit from filing a tax return instead of using the Child Tax Credit Non-Filer Sign-Up tool to receive other credits including the Earned Income Tax Credit. For more information about AdvCTC tools, see below.
  • Unless they unenroll, the monthly payment amount will be up to $300 per month for each qualifying child under age six at the end of 2021 and up to $250 per month for each qualifying child ages six through 17 at the end of 2021. Payments will be issued either by direct deposit or paper check.
  • AdvCTC or CTC amounts are not income and will not be reported as income on the taxpayer’s 2021 income tax return.
  • If a taxpayer is unsure if he or she qualifies, he or she can use the IRS Advance Child Tax Credit Eligibility Assistant tool.
  • If a taxpayer wants to opt out of the monthly payments, he or she can unenroll on the IRS Child Tax Credit Update Portal (CTC UP). For taxpayers who file a married filing joint tax return, each person must unenroll through the portal. Taxpayers who unenroll will receive the balance as lump sum for the CTC on their 2021 individual income tax return filed in 2022. For information about why a taxpayer may want to unenroll, see below.
  • Taxpayers can use the CTC UP to:
    • Check if they are enrolled to receive advance payments;
    • Unenroll to stop getting advance payments. Taxpayers do not need to unenroll each month; and
    • Provide or update bank account information for monthly payments. This can only be done now for subsequent payments, not for the July or August payments.
      Payment Month Monthly Deadline Payment Date
      July 6/28/2021 7/15/2021
      August 8/2/2021 8/13/2021
      September 8/30/2021 9/15/2021
      October 10/4/2021 10/15/2021
      November 11/1/2021 11/15/2021
      December 11/29/2021 12/15/2021

       

  • All taxpayers who receive AdvCTC will have to reconcile the total payments received versus the total CTC they qualify for based upon their 2021 income and filing status. When taxpayers file their 2021 individual tax return in 2022, they will determine the remaining portion of the CTC they are eligible to receive. For example, if the taxpayer is eligible for a $3,600 credit for a five-year-old child and received $300 per month June through December (total advance payments of $1,800), the taxpayer will receive the second half ($1,800) when his or her 2021 tax return is processed.
  • If the taxpayer receives a total amount of AdvCTC payments that exceeds the CTC they can properly claim on his or her 2021 tax year, the taxpayer may need to repay to the IRS that excess payment. For additional information about reconciling the AdvCTC and CTC, read the upcoming Part III of this series.

Families eligible for AdvCTC payments will receive three letters. The first letter advises of potential eligibility and provides a link to IRS.gov for more information. The second letter provides an estimate of each person’s monthly payment amount. The third letter, to be issued in January 2022, will show the actual payments and payment total issued during 2021. This information will be used in reconciling the credit amount in their 2021 individual tax returns.

Information About Why a Taxpayer May Want to Unenroll From the Advance Child Tax Credit

For many taxpayers, CTC increased between 2020 and 2021, but the AdvCTC received may still be more than the CTC. Individuals who received a small refund for tax year 2020 or who have a tax liability may want to consider unenrolling from AdvCTC. Alternatively, taxpayers can increase their withholdings with Form W-4, Employee’s Withholding Certificate, or make quarterly estimated tax payments for the rest of the year if they anticipate owing tax. Some taxpayers will struggle to pay a tax bill they were not anticipating or expected to have a large refund in 2022 based upon their annual CTC. These taxpayers should remember that their refund might be smaller when they file their 2021 tax return because of AdvCTC payments. People who are self-employed should pay particular attention to make sure they are making sufficient tax payments to cover their 2021 obligations.

First-Time Parents

Congratulations on having your first child! But keep in mind that AdvCTC is based on the children claimed for the CTC on the 2020 tax return (or 2019 tax return, if your 2020 tax return has not been processed as of the payment determination date for any of your monthly AdvCTC payments). If your child was born in 2021, the IRS does not have that information in its records. Later this year, the CTC UP will be updated to allow most individuals to inform the IRS about the qualifying children you will claim on your 2021 tax return so that the IRS can calculate your estimated 2021 CTC and therefore adjust the amount of your monthly AdvCTC payments.

However, if you do not receive AdvCTC payments for a qualifying child you will claim in 2021, you may claim the full amount of your allowable CTC for that child when you file your 2021 tax return.

Conclusion

The IRS has acknowledged that taxpayers may need help and has stepped up. Over the weekend of July 9-10, the IRS offered AdvCTC Free Tax Prep Days to people without a filing requirement who could benefit from the AdvCTC. This program was expanded to include July 23 and 24. TAS and clinics within the Low Income Taxpayer Clinic Program also dedicated their time and resources to helping taxpayers navigate this system.

To generate the maximum benefits for society, the IRS must reach all families eligible for the expanded credit. The IRS should keep its focus on reaching low-income taxpayers and leveraging its partners, stakeholders, and other agencies across the United States, including members of Congress, to reach those families currently not in the system.

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The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.

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