Advance Child Tax Credits Under the American Rescue Plan Act

Advance Child Tax Credits Under the American Rescue Plan Act

June 11, 2021

Starting in July, families who are eligible for the Child Tax Credit will start seeing some enhanced credits and direct payments of the credit, thanks to some changes under the American Rescue Plan Act (ARPA) of 2021. As of right now, these changes are only relevant to the 2021 tax year. However, President Biden’s various tax proposals do include provisions that would make these items permanent. At this point, it is hard to know for sure what the outcome will be, but it is very possible that this new Child Tax Credit will exist beyond 2021.

The two keys to this enhanced Child Tax Credit are: 1.) the credits have been increased for children and, 2.) in certain instances, there will be advance payments of these credits to taxpayers before filing their tax return for 2021. The advance payments are slated to begin in July of 2021, although the IRS has yet to offer guidance on how the advance payments will work and how taxpayers can opt out if they want to wait until they file their tax return.

Under the existing Tax Law, children under the age of 17 qualify for a maximum Child Tax Credit of $2,000. For 2021, the credit has been raised to $3,000 for children between the ages of 6 and 17 at the end of 2021, and $3,600 for children under the age of 6 at the end of 2021. The increased amounts of the credit do phase out above the following Adjusted Gross Income (AGI) levels:

  • $150,000 for married taxpayers filing jointly and qualifying widows/widowers
  • $112,500 for heads of household
  • $75,000 for other taxpayers, such as those who are married but file separately and single

Beginning in July, and throughout the remainder of the year, the IRS will automatically send advance payments of 50% of the estimated credit for eligible taxpayers. So, if you have a 10-year-old, for example, and are eligible for the full $3,000, you could receive $1,500 of that credit over the next six months. The IRS will determine eligibility based on your 2020 tax return (or your 2019 tax return if you haven’t filed 2020 yet).

Taxpayers will have the opportunity to opt out of this advance payment, if they would like. More details on how to opt out will be provided from the IRS. If your income is higher in 2021 and you are ineligible for the full advance of the credit, you will have to repay it on your 2021 return. As a result, you may want to opt out of the advance payments if your income in 2021 will be significantly higher than your 2020 income. You will also be able to provide updated information to the IRS if you want the computation adjusted.

The IRS has started sending send letters to taxpayers informing them of the enhanced credit, with personalized letters noting their calculation of the advance payments coming in mid-July. As well, the IRS has promised to launch additional tools related to this credit in the coming weeks. HBE will continue to keep you informed as additional information and updates are provided.

This communication and any applicable contents pertaining to COVID-19 employer relief provisions is based on our professional judgment given the facts provided to us and the COVID-19 employer relief provisions guidance as of the date of the communication. Subsequent developments changing the facts provided to us, or differences in the final guidance and regulations once they are issued, may affect the advice provided. These effects may be material.