Everything to Know About Child Tax Credits

Written By Cathy Lovering
Last updated September 13, 2021

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Personal Finance
September 13, 2021

Simple. Thrifty. Living.

Some families were surprised — and delighted — to receive money from the IRS this summer. It’s part of an advance payment initiative of child tax credits. Wondering how does this child tax credit work, how you qualify, or if you should opt out? Here’s everything to know about child tax credits.

Here’s the upshot about the child tax credits: they are not new. They are an expansion of the existing child tax credit program. But this year, there are three important changes:

  • expanded eligibility
  • bigger amounts
  • advance payments

Here’s how to understand how does the child tax credit work, from a tax return perspective. The benefit is a credit. It reduces the amount of tax you owe once everything else has been calculated. That’s different from a deduction, which reduces the amount of your income that is subject to taxation.

The American Rescue Plan Act of 2021 provided for an increase in the child tax credits — $3,600 for children under 6 and $3,000 for children under 17. The same law mandated advance payments. This money can help people with everyday living expenses, or offer another source of funds to create a savings account for the future.

Not everyone is eligible for the full credit amount. If a household income is over a certain threshold, taxpayers receive a prorated amount. Specifically, the full amount applies in the cases of:

  • single person returns up to an income of $75,000
  • joint returns up to $150,000
  • heads of household up to $112,500

For incomes above these amounts, the credit is reduced by $50 for every $1,000 of adjusted gross income.

Anyone who lives in one of the 50 states or the District of Columbia, and has a qualifying child, is eligible for the credit. In order to qualify, the child must be:

  • the taxpayer’s son, daughter, stepchild, sibling, step-sibling, foster child; or
  • a descendant of one of those individuals.

The child must live with the taxpayer at least half of the year. That child must not pay more than half of their own living expenses. To get the credit, the taxpayer must also claim the child as a dependent. The child must also have one of the following statuses:

  • A U.S. citizen
  • U.S. resident alien
  • A U.S. national

Take this info into account when you review how does the child tax credit work. The criteria can be broad, and there are a number of individuals in your household who may open up your qualification for the credit.

Most people do not have to do anything to get the credit. If you filed a 2020 or 2019 tax return, and otherwise qualify, you automatically get the advance payments. Anyone who has not filed a tax return, or does not normally do so, can access the credit using the IRS non-filer sign-up tool.

Advance Payments

The payments people are receiving in 2021 are advance payments of the child tax credit they will claim on their 2021 tax return. The maximum people can get is 50% of the expected credit they would claim on their return filed in 2022 for the 2021 tax year. The monthly advance payments are therefore a maximum of $300 for children under age 6 and $250 for children aged 6 to 17.

You do not have to have income or file a tax return to qualify for the advance child tax credit. You also do not need to have a permanent address or bank account. The IRS has an advance child tax credit eligibility assistant where people can check whether they can get the payments. There’s also a non-filer sign-up tool for people to report that they have children who qualify them for the credit, even if they did not file a tax return and don’t plan to.

Because of the expanded eligibility, some estimates state that up to 2.3 million children won’t receive the tax credit if their caregivers don’t know how to access the program. Other estimates put the figure at 4 million and are calling upon advocates and community groups to reach out to families to help them access the funds. They can help spread the word about how does the child tax credit work and how to start payments.

What if you’ve reviewed how does this child tax credit work — and you want to opt out? The main reason for wanting to do this is to reduce the chance you will owe the IRS money at tax time. The advance child tax credit reduces the amount of the credit that comes back to you when you file your 2021 taxes in 2022. If you expect that the advance payments will tip your balance into the “amount owing” category, you might want to refuse the monthly benefit.

Opting Out

To opt out, you must unenroll. You will receive the following month’s payment unless you unenroll three days before the first Thursday of the following month. With a joint return, both spouses must unenroll. If only one unenrolls, they will receive half of the expected payment.

To unenroll, visit the Child Tax Credit Update Portal. If you unenroll, you cannot reenroll until after the September 15, 2021 payment.

Advance payments were first sent out on July 15, 2021, and the second payment was August 13, 2021. The remaining four payments will be issued on the 15th of every month until December 15, 2021. The IRS will issue the money by direct deposit using whatever bank account information they already have on file. If you are not signed up for direct deposit, the IRS sends a paper check to your mailing address.

That means the money will arrive just as you’re trying to have an economical Thanksgiving meal. These funds can help families with a little extra money in their pockets, and supplement savings they get from simple strategies to reduce winter household costs.

The IRS has a comprehensive guide about all tax credits and deductions, including everything to know about child tax credits. As more people are eligible for money to support their families in 2021, knowing how to access the benefit and what it means for your taxes is increasingly important.

About the Author

Cathy Lovering

Catherine Lovering has written about personal finance and health for over 10 years, with bylines on IvyExec.com and Healthline.com. She holds an LL.B. (J.D.) from the University of Victoria.

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