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The expanded Child Tax Credit is probably coming at you: here's what you need to know

In a few weeks, most American families with children will begin receiving advance payments of the 2021 Child Tax Credit.

The credit itself has long been a part of the tax system, but the American Rescue Plan increased the amount of the credit from $2,000 per child to $3,000 for kids over age six, and $3,600 for kids five and under. It also split the credit into two parts: half payable as a monthly direct deposit; and half as a credit to be claimed when you file your 2021 taxes next year. The legislation also increased the amount of money parents can earn and still be eligible for the credit. For now, this is a one-time increase, and the credit is set to go back to its former amounts and limits next year. But the Biden Administration has expressed interest in extending the expansion for at least five more years.

Payments will be determined based on the AGI, and the number of children claimed as dependents, on either your 2019 or 2020 tax return. If you filed taxes in either year, there’s no action needed on your part. You can use this tool to determine your eligibility and the amount you will receive. If you were not required to a tax return in either year, but have at least one qualifying child, you still may be eligible. You can use this tool to sign up.

For most families with kids, this will be a pretty straightforward process: the first payment will be made 7/15 (watch your bank accounts, and soon an update portal will go live where you can provide new bank info if you need to) and continue monthly through the year. It’s being split this way so families can use the money when they need it: after all, a lower tax bill in April is great, but that doesn’t make it easier to pay for summer camp and diapers now, when many families are still recovering from COVID-related income loss.

But of course, there are some common questions, such as:

Are the monthly payments taxable? No. They are a partial prepayment of a credit you would otherwise claim on your tax return. They also do not affect eligibility for other benefits.

What about children born or adopted in 2021? The update portal will allow you to change the number of your qualifying children; once you make the change, the amount of the monthly payments will be adjusted to reflect the update. Or, if you don’t update the portal, the entire amount of the credit will be applied to your 2021 taxes when you file.

What if I would prefer to apply the full credit instead of receiving the monthly payments? You can unenroll from advance payments, but note that if you are married and file jointly, both spouses need to unenroll individually. if you typically owe, or you expect that your 2021 income will be higher than last year’s, it might make sense to unenroll, in particular if you don’t need the money urgently.

What if I’m not married to my child’s other parent? If the credit is typically alternated between parents each year - a common scenario in divorce, for example - the last parent to claim it will likely receive the advance payments, but then owe the money back at filing time. In that situation, it’s probably advisable for that parent to opt out of the advance payments to avoid having to repay. If only one parent claims the child and the credit, this year’s credit will properly remain with them.

The IRS and the White House have both compiled extensive FAQ pages to address further questions about eligibility and the process.


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