What Parents Need to Know About the Child Tax Credit Payments

As the country continues to bounce back from the COVID-19 pandemic, many families may be in line for some additional cash this summer to help with the road to recovery.

It’s the result of the American Rescue Plan Act of 2021, which President Biden signed into law this past March. Part of the package includes a one-year expansion of the annual child tax credit to make it available to more families and to pay a higher overall amount.

But instead of claiming the full credit when they file taxes next year, many parents will be getting half of the 2021 child tax credit in the form of direct monthly payments that start on July 15.

If you have kids, here’s what you need to know about the child tax credit payments.

WHO IS ELIGIBLE

The Treasury Department and IRS estimate that the families of 88 percent of children in the United States (about 39 million households) will automatically begin receiving monthly payments in July.

In a typical year, parents can claim a credit of $2,000 for every child who is 16 and under. Under the new rules for 2021 only, families with children aged 5 and under, including babies born this year, could receive up to $3,600 per child; those with kids 6 to 17 could receive up to $3,000 per child. Also new this year, parents of 18-year-olds and full-time college students between the ages of 19 and 24 can get up to $500 for each dependent.

Children must have their own Social Security numbers and live at least part time with the parent claiming them. The children and at least one parent must be U.S. citizens.

To qualify for the additional credit, single filers must have an adjusted gross income (AGI) of $75,000 or less; heads of household, an AGI of less than $112,500; and qualifying widows or widowers and married couples, filing jointly, an AGI of less than $150,000. The increased credit will start to phase out by $50 for every $1,000 or fraction thereof beyond the income threshold. You can use this calculator to help you estimate the amount you’ll receive.

HOW IT WORKS

The advance payments will be estimated from information included in eligible taxpayers' 2020 tax returns (or your 2019 returns if the 2020 returns are not filed and processed yet). The IRS will send half your 2021 tax credit this year, spread over six months from July through December. That works out to up to $250 each month per child who is 6 to 17, and up to $300 each month per child who is 5 and under. Then you’ll get the other half of your child tax credit after you file your 2021 return next year.

Similar to the stimulus checks, the advance payments will be directly deposited into your bank account if that’s how you received your refund or past payments. If the IRS does not have your direct-deposit information, you will receive the credit as a paper check or debit card.

But what if you had a baby this year? If you had a child or took on dependents in 2021, or if your filing status or income has changed (or was too low to file for taxes in 2020), you can submit that information and any other relevant changes to your tax situation to the IRS via one of two portals it plans to create on its website. The portals are expected to be online by July 1; the IRS will post updates on its site.

One other change to note for tax year 2021: The credit for qualifying children is fully refundable. This means that taxpayers can benefit from the credit even if they don't have earned income or don't owe any income taxes.

YOU CAN OPT OUT OF THE PAYMENTS

If you’d rather get your child tax credit as one lump sum next year, you can opt out of this year’s payments through one of the aforementioned portals. Keep in mind that this means you won’t get any payment at all until the IRS processes your 2021 tax return next year.

Why would you want to forgo the direct payments? You may choose to opt out if you know your family situation will change later this year, or if you're concerned the IRS might overpay you and you could end up owing money next year.

This publication is not intended as legal or tax advice. Consult with a tax professional for tax advice that is specific to your situation.