Biden Approves Recurring Monthly Payments to Families With Children

The American Rescue Plan signed by President Joe Biden includes significant changes to the Child Tax Credit, impacting millions of families throughout the nation. As was the case with stimulus payments since the start of the pandemic, specific details determine who qualifies. Let’s take a look at the eligibility requirements and further information surrounding the changes.

What is the Child Tax Credit?

The Child Tax Credit is not new. However, there are significant changes for 2021. The purpose of the tax credit is to help taxpayers and families and ensure adequate funds for families with children. As a tax credit, it decreases the taxpayer’s tax liability dollar-for-dollar (instead of simply reducing taxable income).

The American Rescue Plan made the following changes to the Child Tax Credit for 2021:

• Increased the maximum annual credit from $2,000 to $3,600 for qualifying dependent children under 6 years old.
• Increased the maximum yearly credit from $2,000 to $3,000 for qualifying dependent children from 6-17 years old (the age limit was 16 in previous years).
• The credit has been changed from partially refundable to fully refundable (meaning, taxpayers will get the money even if it reduces their tax liability below $0).
• Monthly payments will be made in advance, beginning in July, rather than waiting until filing 2021 tax returns.

It’s important to note that the changes, as of now, are only applicable for 2021. Unless further legislation is passed, the Child Tax Credit will return to its previous form for 2022. President Biden has expressed interest in making longer-lasting or permanent changes, but for now, the changes only impact the 2021 tax year.

Advance Payments

The change that will have the most significant and most obvious impact for most American families will be the advance payments made by the IRS. While tax credits are typically applied at the end of the year when filing tax returns, the execution will be different for the Child Tax Credit in 2021.

Advance payments will be sent monthly from the IRS directly to eligible taxpayers, beginning in July. Most eligible families will receive the payments automatically, requiring no action to claim the credit.

Eligible families will receive payments of $300 per child each month for children under 6 years old. The monthly payment for children 6-17 years old will be $250 per child.

Payments will be made on the 15th of the month for each month from July through December. If you receive your income tax refund by direct deposit, you’ll get the Child Tax Credit by direct deposit to the same account. Taxpayers who do not use direct deposit will receive a check from the IRS by mail.

These monthly payments will account for half of the Child Tax Credit for 2021, and the other half will be applied when filing 2021 income taxes.

Eligibility Requirements for the Child Tax Credit

The Child Tax Credit intends to help low and middle-class working families, so income requirements determine eligibility. To qualify, the maximum modified adjusted gross income (AGI) levels are:

• $75,000 for single filers
• $112,500 for head-of-household filers
• $150,000 for joint filers

If your income is above those limits, you may still be eligible for a reduced credit. For each $1,000 of additional modified AGI, your annual credit will be reduced by $50. For example, a married couple that files jointly with a modified AGI of $175,000 would have a reduction of $1,250 (25 x $50) per child.

Aside from income, there are other basic eligibility requirements (and these remain unchanged from previous years):

• The child must be a U.S. citizen, national or resident alien.
• The child must have a social security number.
• The child must be claimed as a dependent on your 2021 tax return.
• The child must be related to you.
• The child must live with you for at least half the year.

Eligible families will be automatically enrolled for the advanced monthly payments if you filed a tax return for 2019 or 2020 and claimed the child as a dependent on those returns.

If You Didn’t File Income Taxes in 2020 or 2019

If your earned income was low enough that you didn’t need to file income tax returns for 2020 or 2019, you might still be eligible for the Child Tax Credit benefits, but you’ll need to take action. However, if you signed up with the non-filer tool last year to receive a stimulus check, you’re already in the system, and no further action is needed.

You can use the non-filer tool to sign up for the Child Tax Credit if you meet the following criteria:

• You have at least one qualifying child
• You earned less than $24,800 (married couples), less than $18,600 (head of household), or less than $12,400 (single filer)

To use the non-filer tool, you’ll need:

• A social security number for you and your spouse (if you’re married)
• Social security numbers for your children
• Email address
• Mailing address
• Bank account information, if you want to receive payments by direct deposit

Opting Out

While most eligible families will be automatically enrolled to receive the advance payments, the IRS does provide an opportunity to opt-out. Opting out doesn’t mean that you won’t receive the Child Tax Credit, but it does mean that you won’t receive monthly advance payments.

Although the payments are being made in advance, this is still a tax credit as opposed to a stimulus payment. If you receive advance payments for the Child Tax Credit and then you’re not eligible for the credit when you file your 2021 tax returns, you will owe the money that you received in advance.

If your 2021 income is likely to rise above the eligibility requirements, you may want to opt-out to avoid receiving payments that you’re likely to owe back when you file your tax returns.

Conclusion

The American Rescue Plan brings significant changes to the Child Tax Credit. While you might not think about most tax credits until it’s time to file your taxes, things are different in 2021. The advance payments that will be made monthly for the second half of the year should provide significant relief to families struggling due to the pandemic. These changes may only impact 2021, but we’ll have to wait and see if President Biden’s proposed American Families Plan that would extend the benefits is passed.