The US bailout plan of 2021 includes dramatic one-year tax changes that will particularly benefit parents of children under the age of 18.
With major changes to the child tax credit, American parents may be eligible for child tax credit prepayments. That means parents may be able to see monthly earnings in their bank accounts starting July 15th.
While most parents are automatically enrolled in the new child tax prepayment, some parents need to take action. We explain how parents who have new children or change their tax situation can take advantage of these new tax payments.
What are the Child Extended Tax Credits?
The American bailout plan expanded and changed child tax credits. Taxpayers shouldn’t expect these changes until 2021 (as of now). The biggest changes include:
All parents with an Adjusted Gross Income (AGI) less than $ 200,000 (single) or $ 400,000 (married together) are eligible for the “old” tax credit of $ 2,000 per child. After that, the credit begins to expire.
However, stricter income criteria apply to the “extended” tax credit (the $ 1,000 or $ 1,600 increase). It starts to expire at lower thresholds. The thresholds depend on the login status. For every $ 1,000 a parent earns above the threshold, the extended credit is reduced by $ 50.
- $ 75,000 – single
- $ 112,500 – Head of Household
- $ 150,000 – Common
Parents who are not entitled to the increased child tax credit are also not entitled to advance payments, not even in reduced amounts.
Who will automatically receive prepayments?
Parents who submitted a tax return in 2020 and have no significant changes in their tax situation and are entitled to income can expect an advance tax payment from July 15.
The tax prepayments are transferred directly to the current account deposited with the IRS. Parents can expect to pay $ 300 each month for each child under 6 years old (based on birthday on December 31, 2021) and $ 250 per month for children 6-17 years of age (based on birthday on December 31, 2021 ) to obtain.
This means a parent with children ages 2.5 and 8 can expect monthly payments of $ 850. Most taxpayers do not need to take any action to receive these prepayments on the 15th of each month.
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Who doesn’t automatically get advance child tax credit prepayments?
The IRS is working to add as many eligible families as possible to the child tax prepayment system.
However, many parents who are eligible for prepayment need to take action to receive the payment. These are the groups most likely to be affected by changes.
How to apply for child tax credit prepayments
Below we describe the actions each of the groups listed above should take.
You will have a new child in 2021
Families who give birth or adopt a child in 2021 are entitled to a child advance. However, these families will need to register the new child (with a social security number) through a new IRS web portal.
The IRS announced that the web portal will open no later than July 1, 2021. New parents should monitor this page for a link to the portal when it opens.
Parents who do not register in 2021 are still entitled to the full child tax credit. However, parents who do not register for prepayments in 2021 will not receive prepayments. Instead, they’ll get the money as a tax refund when they file in 2022.
You became a primary custody parent in 2021
The IRS assumes that all filings will remain the same starting in 2020. If you have custody of a child in 2021, you must report it through the IRS portal. Monitor this page to see when the new portal opens. Parents should try to make changes as early as possible to make sure they get the check.
It is recommended that custodial and non-custodial parents coordinate to ensure that the appropriate parent receives the prepayments. Most people will have to repay prepayments for the tax credit if they were made in error. The only exception to this rule are very low earners, who may not be responsible for the full amount.
You have not submitted a tax return for 2020
People who did not have to file a tax return in 2020 must file a tax return in order to receive the advance payments for the child tax credit. Parents are urged to use the IRS free filing system to file their taxes. This can be done through the IRS’s free file partners (including TurboTax and FreeTaxUSA).
If you had no income in 2020, you may have a hard time using online tax software programs to help you with your tax returns. That shouldn’t prevent you from submitting. Get free professional help so you can submit a paper return. The IRS now allows people with an income of $ 0 to file applications. This enables applicants to opt for payments including the advance payments for the child tax credit.
Once the parents have submitted their statement, the IRS can send the prepayments by direct deposit. If you don’t have a bank account, there are many toll-free banks online that allow you to receive payments.
Your income is expected to decrease in 2021
Parents who earned above certain thresholds in 2020 should not expect advance tax payments in 2021. The exact formula for receiving the payments will depend on both income and the number of dependent parents. The total pre-tax credit decreases by $ 50 for every $ 1,000 parents earn above the threshold.
A married couple with one child (age 10) with an AGI of $ 170,000 in 2020 would not be eligible for prepayments. Based on their 2020 income, they are not eligible for the additional $ 1000 benefit provided by the American Rescue Plan. Therefore, they are not entitled to advance payments.
However, if this family is expected to earn less than $ 150,000 in 2021, they would be eligible for both the increased credit and child tax prepayments.
The best guidance currently offered is that parents should be able to report material changes through the IRS portal. Monitor this page for the link to the IRS portal for filing changes. The link to the portal will be activated by July 1, 2021 at the latest.
Your marital status has changed
Whether you get married or divorce in 2021, a change in marital status will likely affect your eligibility for advance payments. By July at the latest, parents should be able to report changes in marital status via a special IRS portal. Monitor this page from the IRS for information on when the portal opens and how to navigate to it.
Who should opt out of payments in 2021?
Many parents who are eligible for prepayment choose to do so. However, some parents may wish to decline the prepayments. The IRS will have a separate portal for those who wish to opt out.
Parents who are not eligible for advance payments in 2021 but still receive them will typically have to repay the IRS at tax time in 2022. There are some safe harbor rules for people on very low incomes. The safest rule, however, is that unauthorized parents should refuse payments.
Some reasons to consider waiving payments in 2021 are:
Parents who fall into any of these categories can monitor this page on the IRS website. By July 1, the IRS will be adding a portal through which parents can opt out of child tax deductions prepayments.