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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.
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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.
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.
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.
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.