Advance Child Tax Credit Payments: What You Need to Know

The advance Child Tax Credit payments began arriving a few weeks ago, with the first credits being paid to more than 36 million families on July 15. These payments were established by the American Rescue Plan Act, created to facilitate the U.S.’s recovery from the COVID-19 pandemic. The nearly $2 trillion American Rescue Plan also includes the direct stimulus payments and the extension of unemployment compensation, among several other initiatives to provide funds to state and local governments.  

Increased Child Tax Credit

The American Rescue Plan Act raised the Child Tax Credit maximum from $2,000 to $3,000 annually per child ages six to 17 (the age limit was raised from 16 to 17) and from $2,000 to $3,600 annually per child under the age of six. All working families will receive the maximum credit if they meet the following income limits: up to $150,000 for a couple or up to $112,500 for a family with a single parent, also referred to as a head of household. According to the Act, payments will be sent via direct deposit on a monthly basis to qualifying parents. In other words, a parent or parents within these income limits will receive $300 per month per child under the age of six and $250 per month per child for any children ages six to 17. The Act calls for one year of credit payments at these increased numbers. The main idea behind the concept of regular, monthly payments is to help parents pay for the ongoing costs of childcare throughout the year in lieu of having them claim a credit once a year when they file their taxes.

Because the American Rescue Plan Act was only signed into law in March of this year with the planned monthly payments beginning in July, eligible families will receive half of the one-year credit total via equal monthly payments from July through December 2021, and the other half of the credit total will be paid as a lump sum when the parents file their 2021 taxes.         

Below is a breakdown of what you need to know about these payments.

Eligibility and Payment Amount

Parents with dependent children ages 17 and under who have a Social Security number and who meet the income requirements are eligible for the new credit. Previously, families had to have at least $2,500 in taxable earnings to receive the credit, but the American Rescue Plan Act temporarily eliminates that requirement. According to estimates, the IRS believes nearly 90% of families with children in the U.S. are eligible. Qualified households with adjusted gross income below the following levels qualify for the full monthly payment:

• $75,000 for individual taxpayers,
• $112,500 for heads of household, and
• $150,000 for married taxpayers filing jointly.

The monthly payments begin to be reduced by $50 for every additional $1,000 of adjusted gross income, and the increased payment is phased out for wealthier families. The previous credit of $2,000 per child is still available subject to an upper income limit of $200,000 for individuals and $400,000 for married couples.

How, When, and Where?

The advance Child Tax Credit payments are based on your most recent tax return, which for most people is your 2020 tax return. If you are eligible to receive the payments based on your most recent return, you should receive the payments automatically without any additional action. The IRS will send out a majority of the payments through direct deposit with the banking information on file from the most recent tax season. If you are eligible for these payments but not enrolled in direct deposit, you will receive a check in the mail. The first half of the total payments that are scheduled to be paid out monthly were/will be made on the following days:

• Thursday, July 15,
• Friday, August 13,
• Wednesday, September 15,
• Friday, October 15,
• Monday, November 15, and
• Wednesday, December 15.

As stated earlier, the second half of the total credit will be paid via a lump sum when you file your 2021 tax return. If needed, you can update your bank account information for your direct deposit through the IRS’s Child Tax Credit Update Portal. Keep in mind that families can only receive these payments to one bank account – in other words, the payments cannot be split up and deposited to two separate accounts. Additionally, if you are divorced with children, only one parent can claim the credit for each child per year. Typically, the parent who has custody of the child for more time receives the credit; however, in some cases, parents may elect to alternate who gets the credit each year. Since the advance Child Tax Credits are based on the 2020 tax returns (or the most recent return the IRS has on file for you), make sure the proper parent is enrolled to receive the advance credits this year, and verify the other parent is unenrolled to avoid the risk of having to pay the money back to the IRS.

Is There a Chance I’ll Owe Money Back to the IRS?

The short answer is, “yes” – it is possible that you may owe money back to the IRS after receiving these payments. Put simply, these payments are essentially the 2021 tax credits that the IRS is prepaying parents based on their most recent tax return; therefore, if your adjusted gross income changes enough to push you above the eligible income ranges in 2021, you may owe some money back to the IRS during the 2021 tax season.

Can (and Should) I Unenroll in These Payments?

As alluded to above, it may make sense for some families to unenroll in these automatic payments. Some parents may prefer to receive the entire credit via the usual lump sum once when they file their 2021 tax return to ensure they collect the appropriate amount they are eligible for and can avoid having to pay any money back to the IRS. Remember, these monthly child tax credit payments are simply an advance of the Child Tax Credit that you would normally get when you file your 2021 tax return. The advance Child Tax Credit payments deduct from the usual lump sum you would receive after filing your 2021 taxes – these advance payments simply get the credit to your family earlier. If you’re concerned your adjusted gross income has increased enough in 2021 from your most recent tax return to impact your credit eligibility, unenrolling in the advance payments may be prudent to avoid owing money to the IRS during the 2021 tax season. When you unenroll in the advance payments, you are choosing to claim the full credit you are eligible for when you file your 2021 tax return.

If you choose to unenroll in the advance payments, you must opt out through the IRS’s Child Tax Credit Update Portal (CTC UP). If you are married and filing jointly, it is very important that both spouses unenroll, as unenrolling is on an individual basis. If only one spouse unenrolls, you will receive half of the total payment your household is eligible for. If you opt to unenroll from the advance payments, you must do so three days prior to the first Thursday of the upcoming month. Once you unenroll, you do not need to unenroll again; the unenrollment applies to all future months, as well. The unenrollment deadlines for the advance monthly payments are as follows:

• For the July 15 payment, you had to unenroll by June 28;
• For the August 13 payment, you had to unenroll by August 2;
• For the September 15 payment, you must unenroll by August 30;
• For the October 15 payment, you must unenroll by October 4;
• For the November 15 payment, you must unenroll by November 1; and
• For the December 15 payment, you must unenroll by November 29.

Note that depending on if and when you unenroll, the dollars you have already received will be deducted from the total amount you are eligible for once you file your 2021 taxes or will be owed back if the amount you have already received exceeds what you are eligible for upon your 2021 filing.

Final Points

Overall, the primary intention of the advance Child Tax Credit payments is to provide families with increased payments in the moment as opposed to the usual protocol of receiving the 2021 credits in 2022, during the next tax season, to help parents throughout the current economic recovery. Everyone’s financial situation is different, and it is prudent to consult your financial advisor to determine whether or not you should stay enrolled in these advance payments.  

Questions and/or interested in how this applies to your financial life?

Email us here: info@afsfinancialgroup.com.