Advance Child Tax Credit
You may have heard or seen that, as of July 2021, the IRS is starting to send out advance payments for the Child Tax Credit.
Background
In past years, if your adjusted gross income ("AGI") was below certain thresholds ($400,000 for Married Filing Jointly and Qualifying Widow(er); $200,000 for all other filing statuses), you were eligible for a tax credit of $2,000 per child age 16 and under.
What's changing this year (2021)?
Nothing if your income is at the higher end of the range. But if your adjusted gross income is below certain thresholds ($150,000 for Married Filing Jointly and Qualifying Widow(er); $112,500 for Head of Household; $75,000 for Single and Married Filing Separately), then the amount goes up by:
$1,600 per child age 0-5 as of 12/31/2021, for a total credit of $3,600
$1,000 per child age 6-17 as of 12/31/2021, for a total credit of $3,000.
The credit is reduced by $50 for each $1,000 you're over the AGI thresholds above.
Plus, the Child Tax Credit is "fully refundable" this year, meaning low-income families who don't owe federal income taxes will still be able to receive the full credit.
There are some other details, but that's the basic idea.
So what are these advance payments?
When Congress passed this law, they wanted to get the money to people sooner rather than later. Thus the concept of "advance" payments.
Starting this month, and then monthly through December, the IRS is supposed to send payments to all eligible taxpayers.
They will calculate what they think the total Child Tax Credit will be per family, and then pay out 50% of that number, divided into 6 monthly payments.
Example please?
If you have 2 children, ages 4 and 10, your AGI is $100,000, and you file your taxes Married Filing Jointly:
You are eligible for a total Child Tax Credit of $6,600.
50% of that is $3,300, so the IRS will send you that much in advance.
It will be paid out in monthly installments of $550 starting in July.
What if I'm close to the AGI thresholds?
The IRS doesn't know what your AGI will be for 2021. So to determine your AGI for purposes of the advance payments, they will use the AGI on your most-recently-filed tax return. (For example, from Line 11 of your 2020 Form 1040.)
What happens if my 2021 tax situation is very different than 2020?
This will be a common scenario. Perhaps your AGI is a lot higher in 2021 (yay!). Or perhaps it went down quite a bit. Or maybe there's another child in the household in 2021.
If any of those things are true, the IRS is still going to send out the advance payments based on your most-recently-filed tax return.
But what will happen is that your true Child Tax Credit amount will be calculated on your 2021 tax return, and the amount of your credit will be adjusted accordingly.
Let's take the same example as above (the couple with two kids), but let's say their AGI jumped up to $500,000 in 2021. The IRS will still send them the advance payments. But in reality they will be eligible for a Child Tax Credit of $0 on their tax return. That amount will be "trued up" on their 2021 tax form, so that the amount that was paid to them in advance ($3,300) will be added to their tax liability.
Can I ask the IRS to change the amount they are going to send me?
Yes. The IRS has a tool where you can update your information to try to make it so that they send you the correct amount (either more or less than the amount based on your 2020 tax return). Click here to go to that IRS page.
Taking a few steps back
The expanded credit is expected to cut child poverty by nearly half, according to a study from Columbia University.
That's pretty remarkable.
The expanded portion of this credit will expire at the end of this year, but we'll see if there's enough congressional support for it to be extended or made permanent.