As part of the American Rescue Plan passed in March 2021, Congress increased the Child Tax Credit to up to 3,000 per eligible child. In addition, eligible taxpayers will begin to receive advance payments in mid-July so they do not have to wait to receive the credit on the 2021 taxes to be filed in 2022. Currently, the IRS is sending letters to 36 million Americans informing them they be receiving the Advance Child Tax Credit Payments. If you believe you are eligible and do not receive a letter, it is possible the IRS does not have enough information to determine if you are eligible. This could be for one of many reasons.

As with all tax regulations, this one comes with a multitude of rules, exceptions and, frankly, pitfalls. Here are a few of those that are most significant:

  • Eligibility is determined by income. Unlike the stimulus payments received in late 2020 and early 2021, overpaid amounts are not forgiven. If you receive the advance payments based on a prior year return, and do not qualify, some or all the advance payments may have to be repaid
  • The amount of the advance credit, and credit is based on the age of the children at the end 2020. It is possible that some children who were eligible in 2020 may not be eligible in 2021
  • The IRS has a portal on its website to enroll, opt out and update information that may affect the payments and the credit
  • Taxpayers may choose to opt out of the advance payments, and some should do so, depending on circumstances. Here are just a few examples:
  1. Your income has increased significantly or even moderately in 2021 compare to 2020.
  2. You share tax benefits with an ex-spouse, e.g. alternating claiming the children each year.
  3. Your income is close to the threshold for reduction in the credit

Two other important things to keep in mind: first, the increased benefit is a one-time occurrence. It is only for tax year 2021 and, as of now, the credit will return to 2000/child in 2022. Also, the IRS has not changed the income tax withholding tables to reflect the increased child tax credit which may or may not have an impact on the results of your tax filing next year.