On March 11, 2021, President Joe Biden signed into law the $1.9 trillion American Rescue Plan to provide financial relief for the American people. Among other effects, this bill temporarily increases the Child Tax Credit and offers advance payments for eligible parents. If you have qualifying children under the age of 18, you could start receiving advance payments as early as July.

Here’s what you need to know.

How Is the 2021 Child Tax Credit Different from Other Years?

Previously, parents could claim a $2,000 child tax credit for qualified children aged 16 or younger. However, the American Rescue Plan has raised the amount (and age bracket) to:

• $3,600 for each qualifying child age 0–5
• $3,000 for each qualifying child age 6–17

There is no cap on the total refundable credit amount you can claim, either. This credit is fully refundable, meaning that if the credit exceeds the amount you owe in taxes, you can receive the difference as a refund.

For example, if you owe $1,000 in taxes and qualify for a $3,000 Child Tax Credit, you would receive a $2,000 refund. In fact, even if you have no income at all—and thus owe no taxes—you can still receive the full refundable credit.

Any payment made to any individual under this provision are not subject to reduction or offset due to outstanding child support debt, Federal agency nontax debt, state income tax obligation, as well as other assessed Federal taxes that would otherwise be subject to levy or collection.

In short, the 2021 Child Tax Credit is bigger and better than ever before, but only for tax year 2021.

When Will Qualifying Parents Receive the 2021 Child Tax Credit?

Because this credit applies to the 2021 tax year, you would normally only receive it when you file your 2021 income tax return in 2022. However, this year, the IRS will pay an advance of up to 50% of the total amount you claim. They will do this by sending out six cash automatic payments on the 15th of each month (unless the 15th falls on a weekend or holidays), with the first installment possibly arriving on July 15th, 2021.

These payments will come in the form of direct deposit, paper check, or debit card. Regardless of the method, each installment will include:

• $300 for each child age 0–5
• $250 for each child age 6–17

After the six months are up, you will have received 50% of your 2021 Child Tax Credit. You can then claim the rest of the 50% when you file your 2021 income tax return in 2022.

But if you’d rather wait and receive the full credit as a refund in 2022 or expect the amount of tax you owe to be greater than your expected refund when you file your 2021 tax return, you can opt out of the advance payment program. The IRS recently implemented a new online tool to do just that.

To stop advance payments, you must opt out 3 days before the first Thursday of next month by 11:59 p.m. Eastern Time, click here for more information.

Otherwise, if you qualify for the advance payments, the IRS will send them to you automatically. The dates for the advance child tax credit payments are July 15, Aug. 13, Sept. 15, Oct. 15, Nov. 15 and Dec. 15.

Who Qualifies for the 2021 Child Tax Credit Advance Payments?

To qualify for the 2021 Child Tax Credit advance payments, you—and your spouse if you file a joint tax return—must meet these conditions:

• Filed a 2019- or 2020-income tax return and claimed the Child Tax Credit on that return (or gave your information to the IRS to receive the Economic Impact Payment using the “Non-Filers: Enter Payment Info Here” tool on the IRS website)
• In general, qualifying child(ren) must be U.S Citizens, U.S Nationals, or resident of the United States.
• Qualifying child(ren) must be claimed as a dependent and live with the taxpayer for more than half of the year.
• Qualifying child(ren) must be the taxpayer’s son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them.
• Qualifying child(ren) must not provide over half of his or her own support for the tax year.

In fact, even if you don’t make enough income to have an income tax return-filing obligation, you can use this tool to provide the IRS with your information. Other than that, all you need to qualify is a qualified child with a valid Social Security number who will still be under age 18 at the end of 2021.

However, while most families will qualify for the full credit, not everyone will. If your annual income is above a certain amount, the credit you can claim will be reduced through two phaseouts.

Here’s how it works:

1. First Income Phaseout

The first phaseout step can reduce only the $1,600 increase for qualifying children ages 5 and under, and the $1,000 increase for qualifying children ages 6 through 17, at the end of 2021.

If your MAGI is more than:

• $150,000 when filing jointly as a married couple or surviving spouse
• $112,500 when filing as head-of-household
• $75,000 when filing in any other capacity

…then that additional credit amount is reduced by $50 for every $1,000 you earn over the limit.

Don’t worry, it’s not as complicated as it sounds.

For example, let’s say Mark and Amy have two children, Peter and Anna. Peter is 8 years old, and Anna is 4. Together, Mark and Amy have a MAGI of $165,000 and file jointly as a married couple. Because their their MAGI exceeds the $150,000 limit for their category by $15,000, their additional credit amount will be reduced by $750. (15 x $50.)

Instead of getting an additional $2,600 (Anna – $1,600, Peter – $1,000), they will only get $1,850 ($2,600 Less $750 Phaseout Amount).

2. Second Income Phaseout

If your modified adjusted gross income (MAGI) is more than:

• $400,000 when filing jointly as a married couple or surviving spouse.
• $200,000 when filing under any other status.

…then the standard $2,000 of your tax credit for each child will be reduced by $50 for every $1,000 you earn over that limit.

For example, let’s go back to Mark and Amy, since their MAGI doesn’t exceed $400,000, they qualify for the full $2,000 tax credit for each of their two children, adding up to a total of $4,000—all of which is fully refundable.

So, for Peter (age 8) and Anna (age 4) they will receive the additional Child Tax Credit of $1,850 ($2,600 Less $750 Phaseout Amount), and the standard child tax credit of $4,000 ($2,000 x 2), for a total of $5,850.

Altogether, Mark and Amy will receive $5,850 ($4,000 initial credit Plus $1,850 additional credit) from the 2021 Child Tax Credit.

Don’t Miss Out on Your 2021 Child Tax Credit

If you qualify for the 2021 Child Tax Credit, you should probably receive the first advance payment on the 15th of July. By default, the IRS will use your most recent tax return to determine whether you qualify for the Child Tax Credit and how much you will receive.

However, if you didn’t file a 2019 or 2020 income tax return because you do not make enough income to have an income tax return-filing obligation, or did not use the “Non-Filers: Enter Payment Info Here” tool to get your Economic Impact Payment, just use this tool to give the IRS the information they need.

And if you:

• Want to forego the advance payments and receive a lump sum payment when you file your 2021 tax return.
• Need to change information about your marital status, income, or number of children.
• Have just had a baby in 2021.
• Are not sure if you qualify for the child tax credit…

…You may use these two new online tools to manage your Child Tax Credit payments. You should be able to (1) determine your eligibility, and (2) adjust your information and preferences as necessary.

For more information, visit Advance Child Tax Credit Payments in 2021.

Still Have Questions?

Hopefully, this article cleared up any confusion you may have about the 2021 Child Tax Credit. But it is a bit of a complicated topic.

If you still have questions, I can help. As a licensed CPA, I’ve helped countless taxpayers navigate the murky waters of U.S. tax law.

Just contact me, and I’ll be happy to give you all the answers you need.

I’m looking forward to hearing from you!