June 15 is Tax Day, take two, for millions of filers
Tax to-do's after you say 'I Do'

Advance Child Tax Credit letter going to 36 million; money to follow starting in July

Family parents on couch children playing on floor1

A letter from the Internal Revenue Service can be scary. But for 36 million families who soon will find such correspondence in their mail boxes, the news could be good. Very good.

The document will have information on the Child Tax Credit (CTC), which was expanded under American Rescue Plan Act (ARPA) provisions that became law back in March. The $2,000 tax break was hiked for the 2021 tax year to $3,600 for each child age 5 and younger and to $3,000 each for those between ages 6 and 17.

Even better, the entire credit is fully refundable for 2021. This means that if your credit amount exceeds what you owe, you can get the full remainder as a refund. Previously, if you had more CTC than tax liability, a maximum of $1,400 per child was refundable.

And the best change is that qualifying families don't have to wait until next tax-filing season to get the increased amounts. ARPA allows the IRS to send the CTC amount to qualifying families in monthly payments through the rest of this year.

Advance CTC amounts start in July: The tax agency will begin issuing the new CTC advance distributions in July. In advance of that, the IRS is sending out the first letter basically as an introduction to the CTC changes.

The letters are going to taxpayers who, based on their 2019 or 2020 tax filings or information they entered online to obtain economic impact payments, look as if they might qualify for the early tax benefit.

Once the IRS determines that a taxpayer is eligible for the advance CTC payment, the agency will send a second, personalized letter with an estimate of the monthly credit amount they can expect.

The payments to eligible families could be as much as $300 per month for each qualifying child younger than 6 and up to $250 per month for each older qualifying youngster. They will be issued July 15, Aug. 13, Sept. 15, Oct. 15, Nov. 15, and Dec. 15, either as direct deposits or mailed U.S. Treasury checks.

No action needed in most cases: Most families who get the initial CTC letter won't need to do anything to get the advance child credits.

The IRS will calculate the amount based on eligible taxpayers' 2020 tax returns. If that return is not available, either because it has not been filed or the IRS hasn't processed it yet, the tax agency instead will determine the CTC payment amount using the taxpayers' 2019 return.

Taxpayers qualify for the new maximum CTC in 2021 if their modified adjusted gross income, based on filing status, is:

  • $75,000 or less and they file as a single taxpayer;
  • $112,500 or less for head-of-household filers; and
  • $150,000 or less for jointly filing married couples or qualified widows and widowers.

If you haven't yet filed your 2020 return and it will make you eligible for the CTC or more of it, then you should submit that Form 1040 as soon as possible.

A current return also will give the IRS your most up-to-date bank data, meaning it can directly deposit the monthly advance credit payments.

Action needed if you don't want the early money: Most of us rarely refuse an added tax break. But some families might decide they don't want the advance CTC payments.

The advance payments will account for half of a taxpayer's expected 2021 CTC amount. To get the remainder, they'll have to reconcile the early payments with the final full credit for which they qualify on their tax returns next year.

That truing up of the full credit amount against advances is causing some concern among tax professionals. They worry that the process could inadvertently lead to a tax bill next tax-filing season.

This could happen, for example, to taxpayers who lost a dependent in 2020 or whose income is higher in 2021. The advances also could create estimated tax complications. Those and other considerations where advance CTC amounts might not be worth it are discussed in a recent Tax Notes article.

Check it out and if you have any concerns about getting the advance payments, talk with your tax adviser.

Online update, change options on the way: If you do decide you don't want the CTC payments, the IRS says it will offer later this summer a resource at IRS.gov where you can unenroll from the advance payments. You then can collect the full CTC amount for which you qualify when you file your 2021 return next year.

This upcoming Child Tax Credit Update Portal also will allow those who do get advance monthly payments to make changes related to the credit. Once it's operational, taxpayers will be able to notify the IRS of changes in their income, filing status, or number of qualifying children, as well as update direct deposit information.

Until the new CTC portal is available, you can stay up to date on what's happening with the advance credit at the IRS' special web page (and here at the ol' blog!). The IRS page also has links to an interactive Child Tax Credit eligibility tool so that families, whether they get one or both IRS CTC letters, can see if they qualify for the advance monthly payments.

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