What You Need to Know About Advance Child Tax Credits

Don't miss out on these tax benefits if you have kids. Here's everything you need to know about the Advance Child Tax Credit...

Help is on the way this summer! The federal government is still rolling out policies to help families in the wake of COVID-19, and stimulus payments are taking on a new form: Advance Child Tax Credit payments.

The IRS is providing financial assistance to Americans who claim children ages 17 and younger as dependents on their taxes. If you filed tax returns for 2019 or 2020 you could begin to receive monthly Advance Child Tax Credit payments as early as July 15th, 2021.

CARD wants to keep you informed so you can make the best decisions when it comes to your money. We have all the details you need to learn more about tax credits, and find out if you or your family members qualify.

Here’s everything you need to know about Advance Child Tax Credit Payments…

What Are Child Tax Credits?

For starters, let’s define tax credits in general. Often confused with tax deductions which exempt part of your taxable income, tax credits are amounts you can actually subtract from the total of what you owe in federal taxes.

Although tax credits may arrive in the form of payments from the IRS, they actually represent money that you won’t have to pay in federal income taxes.

Think of the IRS as a restaurant, and the credit as compensation for a dish you ate during your meal. Although you already finished eating, the item is being struck from your bill! 

A Child Tax Credit is a type of income tax credit offered to American taxpayers for each child whom they claim as a dependent. The credit’s annual total (per child) is calculated based on factors such as the tax filer’s income level, the age of the child, overall tax liability etc…

For tax year 2020, Child Tax Credits only applied to children younger than 17, were only partially refundable, and carried a maximum of $2,000 per eligible child. Thanks to the American Rescue Plan Act (the newest stimulus bill passed in March), Child Tax Credits will look different for the 2021 tax year.

What Are The 2021 Changes to Child Tax Credits?

1. Now Available in “Advance” Payments

In previous years Child Tax Credits were applied when you filed your income tax returns. When the IRS says “advance,” what they’re referring to is the fact that you can get your hands on these 2021 tax-year credits before you actually file your 2021 taxes. 

Remember that you file taxes in the spring for the previous financial year! 

Starting July 15th, half of your annual total will become accessible in monthly installments, and you can claim the rest when you file your 2021 income tax return next year. 

That is unless you opt out using the IRS’s online portal, in which case you’ll receive your total in a lump sum when you file. 

This change to the Child Tax Credit policy is designed to provide some immediate financial relief to families who can’t wait until 2022. 

It’s important to note that these changes are temporary. Unless further legislation extends these stimulus policies the tax credit policy will revert to the 2020 guidelines for tax year 2022.   

2. With Higher Annual Maximums

Now, taxpayers can claim up to $3,600 total for children younger than six – an 80% increase from the total available in 2020. Older kids aged 6-17 are eligible for an annual total of up to $3,000 per year. 

The extra $600 in aid for families of children six years old and younger is a purposeful feature of the stimulus legislation. If you’re receiving the full credit, monthly payments will be around $300 for kids under six, and $250 for older children. 

Remember that only half of your qualifying total is available as advance payments this year! 

3. With More Kids Covered

The previous policy only covered kids 16 and younger, but this year 17 year-olds are  included! 

But warning: according to experts, if you claimed a 17-year-old last year, and your child turns 18 before the end of 2021, they may not qualify for these credits. Use the IRS’s eligibility assistant to double check that your child qualifies.  

4. Plus, They’re Fully Refundable

Refundability is where tax credits can get a bit confusing – let’s clear things up. There are technically three different types of tax credits: non-refundable, fully refundable, and partially refundable. 

Most of the tax credits offered to American taxpayers are non-refundable, which essentially means that they reduce the amount that you owe in taxes, but they won’t carry over into your tax refund.

Here’s an example: Let’s say you’re eligible for a tax credit worth $1,000, but you only owe $800 in taxes total. 

The grand total of taxes that you owe the IRS for a given year is also called your tax liability

The $200 dollar difference is non-refundable, meaning the IRS won’t include it in your tax refund check. In other words, the $1,000 tax credit will cover the whole $800 you owe, but you don’t have access to the extra $200. 

In contrast, if the credit is fully refundable, that $800 is still covered, plus the extra $200 will be included in your federal tax refund. With fully refundable credits, you get to pocket the money if the credit exceeds your total tax liability. 

Partially refundable credits are divided into refundable and non-refundable segments when you file, and you can get money back from the refundable portion (only a percentage of the total credit). 

Refundable credits can provide an important boost, especially if you have less tax liability. In 2021, Child Tax Credits are fully refundable, so if your credit total exceeds your tax liability, you could get the extra money back in your tax refund next year!


How Do I Know If I Qualify?

The first question to ask is do I have a child 17 or younger living in my household? If the answer is yes, you can double check with the eligibility assistant to make sure you qualify. 

Next, take a look at your adjusted gross income – the Child Tax Credit phases out filers who earn an annual income above these thresholds: 

Single taxpayers are only eligible if their annual income is under $74,000. The limit for married couples filing together is $150,000, and $112,000 for heads of household.

In order to assess eligibility and automatically enroll taxpayers, the IRS is looking at data (dependants claimed, income earned, etc…) from 2019 and 2020 tax returns.

 If you didn’t file taxes in 2019 or 2020, don’t worry! You could still qualify for advance Child Tax Credit payments, and the IRS created a tool specifically for you. With the Non-Filer Signup Tool you can provide the IRS with your information, check your eligibility, and enroll in advance payments.

How Will I Receive My Payments?

Once you know you qualify, the next step is to decide whether it’s best for you to receive the credits as advance payments or wait for the lump sum.

If you filed taxes in 2019 or 2020 and set up direct deposit, you will be automatically enrolled. This means that with no action required, the IRS will begin sending you payments July 15th to whichever account that last received your tax refund.

So to find out where these payments are headed, double check your records and find out which account and routing number you last provided to the IRS.

Have you changed your preferred account since the last time you filed? No problem – the Child Tax Credit Update Portal lets you update your direct deposit information, or unenroll from advance payments (and opt for lump sum). Any changes made through this portal will apply to payments from the month of August onwards.

If you don’t have a direct deposit set up for your tax refunds, you will still receive advance Child Tax Credit payments via paper checks in the mail if you are qualified and enrolled.

But direct deposit is actually the fastest and safest way to receive money from the IRS – it might be worth a try. The IRS recommends setting up direct deposit, especially because traditional mail has been moving a bit slower since the pandemic began. 

Phew... that's all that you need to know about the 2021 Child Tax Credit

Now you have the information you need to make the most of Advance Child Tax Credit payments this summer. Take stock of your financial needs and take advantage of the online tools and portals provided by the IRS to make sure your payments go where they need to go. 

Still have questions? Visit the extensive Child Tax Credit FAQ page for more details.

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