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What You Need to Know About the Child Tax Credit Advance

Starting in July of 2021, eligible families will receive monthly payments of $250 for every child aged 6 through 17.  Cash from the federal government with no spending restrictions will be popping up in bank accounts as Americans shore up their finances in the pandemic.

Sounds like another stimulus check, right?  Wrong.

It’s the start of advance payments under the expanded Child Tax Credit (CTC).  Eligible families will get $250 for every child age 6 through 17, between July and December. Families will get $300 per child for every kid under age 6. The first payments will go out July 15 and the IRS will continue to issue payments in middle of each month through the end of 2021.  The credit has been paying families in lump sums at tax time for more than two decades. But earlier this year, Congress gave a one-time boost to the amount, broadened eligibility and enabled payments in advance monthly installments.

Federal lawmakers made these changes when passing the $1.9 trillion American Rescue Plan, a bill that also authorized $1,400 economic impact payments.  This year, the credit increases from $2,000 to $3,600 for children under age 6 and $3,000 for kids between age 6 and 17. Half the sum can be advanced and distributed monthly.  There are also many similarities between CTC money and stimulus checks. In both cases, there are no spending restrictions. Furthermore, households will receive the money if they fall under a certain income limit. The IRS determines stimulus checks and CTC payouts using tax-return data.  Those income limits for full payment are the same for stimulus-check money and expanded CTC payouts. The thresholds are $75,000 a year for individuals, $150,000 a year for married couples filing jointly, and $112,500 a year for people like single parents who are filing as Head of Household.

In both cases, the IRS is looking at whichever recent tax return is available in a two-year window. For the third round of stimulus checks and the CTC, the tax collection agency is looking at 2020 returns, or 2019 returns if this year’s return isn’t yet available.  But there are also important differences people need to remember now and at tax time.

To receive the Child Tax Credit, there must be a ‘qualifying minor’ in the house.  In the past the IRS cut stimulus checks for all eligible children in a household, but it also cut checks to people without qualifying dependents.  Without a minor living in the household, there will be no Child Tax Credit. But the person does not have to be your child, as long as he or she is a dependent.  The child has to live in the household for more than a half of the year and be properly claimed as a dependent, the IRS said.  It’s possible there are some people who haven’t been following the Child Tax Credit and won’t know what the money is. 

The Child Tax Credit is based on ‘real-time’ eligibility

The IRS determined stimulus-check amounts based on one snapshot in time: a household’s tax return. A lot can happen in a year, but if a family had child after filing a tax return, the IRS didn’t have an immediate way to learn about the new dependent and quickly issue another payment.  Unlike the stimulus check rollout, adjustments to the advance Child Tax Credit payments are going to have a more real-time feel.  On Tuesday, the IRS unveiled its “Child Tax Credit Update Portal.” This is where users can actually opt out of payments and also give the IRS current information on the number of eligible kids in a house.

You may have to pay the Child Tax Credit money back

Talk of the portal and opting out brings up another big difference between stimulus checks and advance CTC money. Households paid too much CTC money in advance may have to pay it back, something that doesn’t happen with stimulus check money.  The IRS is basing CTC payment amounts on 2019 and 2020 tax return data, but if someone in a household lands a better-paying job or a nice raise, that could push them out of income eligibility.  If the IRS overpays, it will want the money back during the 2022 tax season. The IRS has said it will deduct the excess payment from refunds, but can work out installment plans for people who don’t have the funds to pay the balance due. (The IRS said it will waive repayment obligations in certain cases.)  This is one big reason why the IRS is giving people the chance to opt out of the advance payments.  The CTC advance payments also don’t have garnishment protections. “To the extent permitted by the laws of your state and local government, your advance Child Tax Credit payments may be subject to garnishment by your state, local government, and private creditors,” the IRS said.

The first payments go out July 15 and June 28 is the deadline to skip the July payment.   Aug. 2 is the deadline to skip the Aug. 13 payment and Aug. 30 is the last day to skip the Sept. 15 payment.  For now, someone cannot opt back into receiving the money after they have opted out.  So, if that 2021 return ultimately reveals an overpayment after accounting for a taxpayer’s income and household situation, the IRS will want the excess money back.  The IRS has said it will subtract the excess amount out of a taxpayer’s refund. If someone owes taxes, including the obligation for the CTC overpayment, the IRS says it can work out installment plans.  If you are concerned you are going to hit the upper limit, why even take the risk? Just opt out.  The worst that could happen is coming under the limit and getting the complete credit during tax season.

Too much income can put you on the hook for repayment!

Another set of people who should consider opting out are parents with older kids who were claimed as dependents in 2020 but will not be claimed as dependents in 2021.  When deciding whether to opt out of the payments, part of a person’s challenge may be estimating how much money they’ll make in 2021 when there’s still six months to go.  The IRS also launched an online tool that can help people determine their eligibility.  Go to IRS.GOV and use the link for the Advance Child Tax Credit Eligibility Assistant.