By James J. DeLuca, CPA, MST
Senior Tax Manager

Millions of American taxpayers with children will begin receiving advance payments of their 2021 Child Tax Credits starting this July. But not all households that qualify for the Child Tax Credit will receive the advance payments, as there are income-based phaseout rules.

The advance payments were created by the American Rescue Plan (ARPA) enacted in March and are intended to ease the financial burdens of families still struggling with the economic fallout from the Covid-19 pandemic.

Families who may be eligible based on information in either their 2019 or 2020 tax returns, or who used the Non-Filers tool on IRS.gov last year to register for an Economic Impact Payment, will receive a letter from the IRS about their potential eligibility. Families who are eligible for advance Child Tax Credit payments will receive a second, personalized letter giving an estimate of their monthly payment, which starts July 15.

The Child Tax Credit (CTC) was created in 1997 as a $500 nonrefundable credit to provide tax relief to middle-income taxpayers, and it was boosted to $1,000 and made partially refundable in 2001. The CTC was doubled to $2,000 by the Tax Cuts and Jobs Act of 2017 and expanded to families with higher incomes – up to $400,000 for married joint filers – though it remained only partially refundable.

The American Rescue Plan Act enacted earlier this year enhanced the CTC to $3,000 for each child from ages 6 to 17, and $3,600 for children under 6, and made the credit fully refundable. The ARPA also raised the age of eligibility for the CTC by one year. These changes are effective for the 2021 tax year only.

The ARPA legislation also created the Advance Child Tax Credit payments that will start in July.

Eligibility for Advance CTC Payments

Generally, people with children aged 17 or under at the end of 2021, and who meet income qualifications, will receive the advance payments.

Advance payments will be subject to phaseout for households with 2019 or 2020 modified adjusted gross income (AGI) over $150,000 for married filing jointly, over $112,500 for head of household filers, or over $75,000 for single filers.

The payments will be made monthly by the U.S. Treasury Department from July through December 2021 and will total 50% of the amount of the 2021 Child Tax Credit that the government believes you are entitled to. When you file your federal income tax returns for 2021 next year, you will be able to claim the remaining 50% of the credit.

If you don’t qualify for the advance payments (based upon your 2019 or 2020 tax returns), you may still take the full Child Tax Credit when you file your 2021 income tax return.

The Rules

It’s important to remember that the advance payments are for the anticipated Child Tax Credit that taxpayers will qualify for on their 2021 tax returns. The IRS is basing its eligibility information on 2020 tax returns and is factoring in the process of aging out. So, taxpayers who have children turning 18 this year will not qualify to receive the CTC for those children, but they will receive it for younger children.

If you showed children on your 2020 tax return who will qualify for the CTC in 2021, you do not need to take any action to receive the advance payments; the Treasury Department will automatically send you these payments if your 2020 AGI falls into the qualifying range.

All children for whom the credit is claimed must have a Social Security number or a Taxpayer Identification Number.

Should You Opt Out?

An IRS web portal will be launched by July 1 that will allow taxpayers to opt out of the advance CTC payments. Why would you want to do this?

If your income increases beyond the advance payment eligibility range for 2021 and you receive the advance payments based on your 2020 AGI, you must return the money to the government. To avoid having to make this kind of payback, you may opt out of the advance payments by notifying the IRS through the web portal.

Conversely, if your 2020 income was above the qualifying range but is expected to drop in 2021, or if you have added a child to the household this year – both events that would qualify you for the advance payments – you can notify the IRS through the web portal.

How the Advance CTC Payments Work

If a family has four children, including 4-year-old twins and two older children ages 7 and 9, their 2021 Child Tax Credit would total:

$7,200 ($3,600 each for the twins)

$6,000 ($3,000 each for the older children)

$13,200 (total)

The advance payments would be $6,600 (50% of the total CTC), payable in six monthly installments of $1,100 each.

This family would be able to claim the remaining 50% of the CTC next year when they file their income tax returns.

Since the credit is fully refundable, a taxpayer whose tax liability is less than the total credit will receive the balance as a tax refund.

Income Phaseout Rules

For 2021, the increased ($1,000 or $1,600) CTC generally is reduced by $50 for each $1,000 (or fraction thereof) of modified adjusted gross income over:

• $150,000 for a joint return or a surviving spouse,
• $112,500 for a head of household, or          
• $75,000 for any other taxpayer, such as unmarried taxpayers and married taxpayers who file separately.

The remaining $2,000 CTC is subject to the existing phaseout rule of $50 for each $1,000 of Modified Adjusted Gross Income over $200,000 for taxpayers claiming single and head of household status and $400,000 for taxpayers filing jointly.

It’s Complicated

The numbers and the structure of the Advance CTC payments are confusing. What is important to remember is that the original $2,000 CTC is still available to all taxpayers who:

• Have children under age 18;
• Show modified AGI over $400,000 (married filing jointly) or $200,000 (other taxpayers), subject to phaseout for income earned over these amounts.

An additional benefit of $1,000 for each child from age 6 to 17 and $1,600 for each child under the age of 6 for households with AGI of $150,000 (married filing jointly), $112,500 (head of household, or $75,000 (single filers and married filing separately) subject to phaseout for income over these limits.

If you have questions about the Child Tax Credit or the advance payments, please contact us.