As recent letters to taxpayers who might be eligible for the advance child tax credit indicated would happen, the IRS is in the midst of launching online portals to help families navigate the advance credit for 2021. This is the next big step in implementing the expanded benefit before monthly distributions of the advance credit begin in mid-July.
The portals will serve two different groups. One will target taxpayers who filed a tax return in 2019 or 2020, and the other, which opened on June 14, will allow eligible nonfilers to provide their information to the IRS so that they can receive the advance payments of the credit. The portals will allow taxpayers to determine their eligibility; change their income, family status and number of qualifying children, and financial information; and opt out of receiving advance payments.
Access to the portals will require authentication. An IRS official describing the process last month said it will verify identities with a wide variety of credentials and permit phone or in-person verification. The new nonfiler sign-up tool asks for the registrant’s name; birth date; mailing address; email address; Social Security numbers for both the registrant and dependents; bank account information, if available; and an identity protection personal identification number from the IRS, if available. The IRS will use the bank account information provided to make direct deposits.
The basic features of the 2021 child tax credit are as follows: Families with incomes under the thresholds will receive $3,000 for every qualifying child between the ages of 6 and 17 at the end of the year and $3,600 for every qualifying child under age 6. The thresholds for the new advance child tax credit are $150,000 for married filing jointly, $112,500 for head of household, and $75,000 for individual taxpayers.
But taxpayers whose incomes are a bit above that can still claim the child tax credit at the $2,000-per-child amount when they file their 2021 tax returns. That part of the credit is available for married taxpayers with income up to $400,000 and individuals up to $200,000, after which the credit phases out. The advance child tax credit and the monthly payments are scheduled to expire at the end of 2021.
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Who Might Not Want Monthly Distributions
One of the options mentioned in the IRS letter to taxpayers that will be available on the portal will allow eligible taxpayers to decline advance payment of the 2021 child tax credit. Why might a taxpayer want to do that? There are at least two reasons.
First, if a taxpayer’s income is approaching the threshold for the advance credit this year — $150,000 for married filing jointly, $112,500 for head of household, and $75,000 for individual taxpayers — and might exceed the threshold and ultimately render the taxpayer ineligible for the larger child tax credit in 2021, then delaying receipt of the credit until return filing time could avoid the need to pay back any amounts that the taxpayer turned out to be ineligible for. The IRS will make distributions of the estimated amount of the advance child tax credit that a taxpayer should receive based on 2020 tax return information.
Second, if the amount of withholding in 2021 doesn’t cover a taxpayer’s liability, the taxpayer might have to pay back part of the child tax credit if a portion of it was received in advance. For this year at least, there won’t be any automatic adjustments to taxpayers’ withholdings to take into account the advance child tax credit.
Taxpayers might want to adjust their withholdings, but should evaluate the best course based on their individual circumstances. If the advance child tax credit is extended beyond 2021, the IRS might automatically adjust withholding, but it isn’t required to do that this year.
Those scenarios of taxpayers who need to pay back advance child tax credit amounts are perhaps unlikely to happen frequently this year because only half of the total child tax credit will be advanced since monthly payments are beginning halfway through the year. But if the expanded, refundable credit is extended beyond 2021, it could be a problem for more taxpayers. That said, taxpayers who want to opt out this year should pay attention later this month for an announcement of when the portals open and then make that election quickly, because direct deposits are slated to begin on July 15.
Reaching Every Eligible Family
The fully refundable nature of the child tax credit for 2021 means that families without enough income to necessitate filing an income tax return in 2019 or 2020 are eligible for the advance benefits, but they’re also the hardest group for the IRS to deliver the benefits to because they don’t have the same points of contact with the IRS as annual filers.
The IRS has learned a lot over the past year about how to deliver economic impact payments, and that knowledge will certainly be a boon to the delivery of the advance child tax credit. The agency has said some advance payments will be provided via mail when the recipient doesn’t have a bank account.
Administering the advance child tax credit this year represents a significant new project for the IRS. The agency has expanded its outreach efforts over the past few years in other contexts, and that recent experience will likely prove helpful during the launch of the monthly payments this year. The IRS said it worked with Intuit INTU and the Free File Alliance to launch the new nonfiler sign-up tool.