IRS’ Advance Payments of 2021 Refundable Child Tax Credit under The American Rescue Plan Act of 2021

The American Rescue Plan Act (ARPA) made the Child Tax Credit (CTC) fully refundable for 2021 and increased the maximum amount from $2,000 to $3,000 per qualifying child for children between ages 6 and 17 ($3,600 for a child under age 6).

The increased CTC would phase out at Adjusted Gross Income (AGI) of:

• $150,000 for joint filers,
• $112,500 for head of household and
• $75,000 for all other taxpayers
• (The AGI phase-out levels for the $2,000 previously available credit remains unchanged)

Qualifying households will begin receiving monthly payments. The first monthly advance payment of this expanded CTC will be made on July 15, 2021.

The increased CTC payments will be made on the 15th of each month, unless the 15th falls on a weekend or holiday, through direct deposit, paper check, or debit card.

Families will receive up to half the amount of the credit to which they are entitled for 2021, in advance, in the form of monthly payments from July through December, and they will receive the other half when they file their 2021 tax returns next year (2022).

Eligible families will receive a payment of up to $300 per month for each child under age 6 and up to $250 per month for each child between age 6 and 17.

The advance payments will be made based on families’ 2020 tax returns (or their 2019 returns, if the 2020 returns are not filed and processed yet). The IRS has released guidance (Revenue Procedure 2021-24) that provides two procedures for individuals not otherwise required to file 2020 federal income tax returns to file returns to receive CTC payments.

The ARPA requires the IRS to develop an online portal so that taxpayers can update their income, marital status and the number of qualifying children, if their circumstances changed in 2021, and they believe those changes could affect the amount of their CTC for 2021. It is expected that this web tool will be up and running by July 1, 2021.

Eligible taxpayers can opt-out of the monthly payment, using the online portal that the IRS will develop, if they do not want to receive advance payment of the 2021 CTC.

The advance CTC payments are not taxable. On the taxpayers’ 2021 Form 1040 that they file next year, they will reconcile the monthly payments received from the IRS in 2021 with the CTC that they are actually entitled to. Taxpayers who receive more in advance CTC payments from the IRS than they are otherwise entitled to, may need to repay the overpayment received, when they file their 2021 taxes, in 2022 (exception under the “safe-harbor” rule for Modified Adjusted Gross Income (MAGI) below certain thresholds specified for this purpose). The law requires the IRS to mail out a notice by January 31, 2022, showing the total amount of CTC payments made to respective taxpayers during 2021.

Additional updates and information for taxpayers on how they can access the Child Tax Credit will be available at IRS.gov/childtaxcredit2021.

If you have questions, please contact your HM&M advisor.

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