The pandemic hasn’t been easy on parents—and that’s putting it mildly. But some relief is on the way: The IRS will soon start sending out millions of payments to parents.
The $1.9 trillion aid package that President Joe Biden signed into law in March temporarily expands the child tax credit. For the 2021 tax year, the credit is upped to $3,000 per child age 17 or younger and $3,600 for children under the age of six. That’s up from the original $2,000 child tax credit which was only sent for children age 16 or younger.
The good news is the expansion of the credit, alongside the provisions of the broader American Rescue Plan, “will dramatically reduce poverty for families with children,” Elaine Maag, principal research associate in the Urban-Brookings Tax Policy Center at the Urban Institute, suggests to Fortune.
Up to half of the 2021 child tax credit could be paid out in periodic payments starting this summer. To help parents better understand the payment, Fortune created a guide of everything to know about the new child tax credit.
How does distribution of the child tax credit work?
Per the legislation, tax filers can get an advance on up to half of the tax credit throughout 2021 in installments from July through December, and the remainder when they file their taxes in 2022. Filers will be able to opt out of the advance payments if they prefer to get the money as a lump sum when they file their 2021 taxes.
IRS Commissioner Charles Rettig has signaled these advances will be paid out monthly. For eligible parents with children under the age of six, that could be a monthly payout of $300 from July through December, and $250 for children 17 to six.
Kathy Pickering, H&R Block’s chief tax officer, sums it up neatly: “In the past, you just claim the credit and you got it in your refund. Next year, you’ll be reconciling how much you got in advance, and how much you’re entitled to, so that you get the remainder of what you’re due on your tax return,” she tells Fortune.
The IRS is setting up an online portal for qualifiers to be able to opt out of the advanced payments and update key information (including their marital status, change in income, or number of children). It should be available in July, Rettig recently said at a Senate hearing.
However, the yet-to-be-released portal is already making some experts apprehensive. H&R Block’s Pickering says it’s not clear if taxpayers will be able to update their bank information via the portal, and Maag notes she is “hoping” the IRS portal will include the option to change direct deposit information.
When that portal is available, experts suggest updating any important information like a change in marital status, a dramatic change in income, and, obviously, a change in the number of dependents. Above all, though, “if someone hasn’t yet filed [their 2020 taxes], and they think they might be eligible for this payment, it is in their best interest to get their tax return filed as quickly as possible,” says Pickering. (The tax deadline this year has been extended to May 17.)
When will the child tax credit start to go out?
According to IRS Commissioner Rettig, the agency expects to start sending out monthly payments in July. Rettig said at a recent Senate hearing that the IRS was working to have the portal up and running by July 1.
Who qualifies for the child tax credit?
Much like the stimulus payments sent out to millions of Americans, the 2021 child tax credit comes with new income cutoffs, too.
Single filers making up to $75,000 per year in modified adjusted gross income, heads of households making up to $112,500 a year, and couples filing jointly making $150,000 or less per year can qualify for the full credits. Above those income levels, the payments would phase out by $50 for every $1,000 in income over that limit, per the stimulus bill.
However, even if you don’t qualify for the new 2021 child tax credit based on your income, you could still qualify for the original $2,000 tax credit. Single filers making up to $200,000 of modified adjusted gross income and couples filing together making up to $400,000 can qualify for $2,000 per child.
Will your child tax credit come via direct deposit or mail?
It’s not clear yet how the tax credit advances will be distributed, but it’s expected they’ll be sent in a similar fashion as the stimulus checks: Via direct deposit for those who have it set up, and mailed checks to those with no bank on file with the IRS.
H&R Block’s Pickering says that “we are still waiting to hear more specific confirmation but we’re using the model that they use for the stimulus payments. So that’s what we’re expecting that the IRS will do.”
Will it reduce your 2021 tax return?
If you received the correct amount of advance payments, it will not reduce your tax return. The expanded child tax credit is a fully-refundable tax credit. If you owe money when you file your 2021 taxes, your bill will be reduced by the amount you qualified for; or if you are due a tax return, that return will include the child tax credit amount.
However, if you were issued more money than you qualified for in advance payments of the child tax credit, it’s possible you may have to pay back some of the money, which would either be taken out of your tax return or added to your bill if you owe money to the IRS, say experts.
Families will have the choice if they’d rather get a lump sum when they file their 2021 taxes next year. H&R Block’s Pickering suggests meeting with a tax advisor to evaluate and make that “personal decision,” while Maag says that, for the advanced payments, “of course, if you’re struggling to make ends meet, then this is an opportunity that you’ll be able to do that.”
Among the considerations Maag suggests parents think about: Back-to-school supplies and needs come September.
Do you have to pay the child tax credit back?
The child tax credit is a fully refundable tax credit, so you don’t have to pay it back.
Importantly, though, it is possible you may end up owing some of the money if you erroneously received more in the advance payments than you qualified for or ended up being ineligible in 2021. That could be the case if you had a sudden increase in income in 2021 or if your tax information was outdated (for example, you had a marital status change or a change in the status of a child this year). In that case, experts say, you could find yourself with a tax bill come tax filing season in 2022. You may then have to pay what was owed through either a smaller refund or a higher tax bill.
There is a caveat, however. For lower-income families, the legislation bakes in a “safe harbor,” where even if you owed part of the credit back, filers would not be on the hook for up to $2,000 per child of that amount, provided they fall into certain income categories. Those limits are $40,000 for single filers and $60,000 for joint filers, with phase outs above those levels as well.
Based on Maag’s understanding, that would likely absolve “most” lower income families of having to pay back erroneous payments altogether because the maximum amount they would likely be able to receive before filing their taxes would be $1,800 per child, she says (or, half of the max credit in advance payments). But the best thing to do to avoid a tax bill later, say experts, is to make sure all your information is up to date (and use the portal, when available, to make any necessary changes).
Will the new child tax care credit become permanent?
Unless Congress acts, this $3,000 (or $3,600 for those six and under) child tax credit will revert back to $2,000 per year starting in the 2022 tax season.
But a push to extend it is already heating up. On Tuesday, House Ways and Means Committee Chairman Richard Neal (D-Mass.) unveiled the Building an Economy for Families Act, a bill that would make the upped child tax credit permanent. Making the $3,000 child tax credit permanent is already publicly supported by several Democratic Senators, including Senators Cory Booker (D-N.J.), Michael Bennet (D-Colo.), Sherrod Brown (D-Ohio), Ron Wyden (D-Ore.), and Raphael Warnock (D-Ga.). However, it’s still unclear when Democratic leaders would try to push through such a change.
On Wednesday, the White House announced a package including “family” policies it’s asking the Democratic controlled Congress to pass. Those policies include extending the $3,000 (or $3,600) child tax credit into 2025.
How much will I get? Check out this calculator
While parents are still waiting for the IRS’s portal, some sites have created calculators to help families determine their eligibility and the amount they may be able to expect.
One such calculator is from Omni Calculator, and it can help parents with varying filing statuses (singe filers, joint, head of household) determine how much they might be getting.
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