The American Rescue Plan offers American families a bigger and better child tax credit for 2021. For this year only, the credit amount for many families is increased from $2,000 per child to $3,000 per child ($3,600 for children under age six), 17-year-olds qualify, and the credit is fully refundable.
One additional major element of the new child tax credit regime requires the IRS to make advance payments of the credit to qualifying families in the second half of this year. The IRS will base eligibility for the credit and advance payments, and calculate the amount of the advance payment, based on previously filed tax returns. It will first look to your 2020 return, and if a 2020 return has not yet been filed, the IRS will look to your 2019 return.
The IRS says that it will issue these monthly child credit payments to eligible families on July 15, August 13, September 15, October 15, November 15, and December 15. Most payments will be directly deposited into bank accounts. Families for which the IRS does not have bank account information could receive paper checks or debit cards in the mail. Most eligible families do not have to do anything to get these payments, provided the IRS has your 2019 or 2020 return information and you don't need to change anything to reflect current circumstances.
The IRS has started sending letters to more than 36 million families that the tax agency believes may be eligible for the advance child credit payments based on 2020 or 2019 return data. The IRS plans to send a second round of letters to eligible families later this summer, and that letter correspondence will list the family's estimated monthly payment.
The American Rescue Plan also requires the IRS to develop an online portal so that you can update your income, marital status, number of qualifying children and direct deposit information. Additionally, people who want to opt out of the advance payments and instead take the full child credit on their 2021 return can do so through the online portal. Although the IRS fully expects to launch these tools by July 1, they are sure to need enhancements and adjustments as taxpayers begin to enter data into the tools. In other words, don't be surprised to see snags, at least in the beginning.