Child Tax Credit Payments Start July 15

Make sure you get your checks

The IRS will send advance payments based on an estimate from 2020 tax returns, or 2019 returns if the 2020 return has not been filed and processed. Payments will come automatically; most people do not need to do anything.

But certain individuals must take action to receive the advance payments. Historically, people needed to have at least a base amount of earned income, such as wages or self-employment, to qualify for the child tax credit. But in 2021, there is no earned income requirement, so people with other income, such as social security, supplemental security income, pensions or IRAs, who have a dependent child or grandchild could qualify. “If somebody is in that category and they don't normally file a return, they may want to file — and I'd say file pretty soon — so that we have something to base the payment on,” says Smith.

One exception would be people who, though not required to file a return because their income was too low or it was non-taxable social security or supplemental security income, used the IRS’ non-filer tool to claim stimulus payments. “When people did that, that was actually considered to be a basic return,” says Smith. “If they did that, then we've got that record. … If their situation is still comparable or similar in 2021, they'd be able to get [child tax credit] payments on that basis."

The Non-filer Sign-up tool is for people who did not file a tax return for 2019 or 2020 and who did not use the IRS Non-filers tool last year to register for stimulus checks. The tool lets you  provide required information about yourself, your qualifying children age 17 and under, your other dependents, and your direct deposit bank information so the IRS can quickly and easily deposit the payments directly into your checking or savings account. 

The IRS has two other online tools for taxpayers. The Child Tax Credit Eligibility Assistant allows you to answer a series of questions to quickly determine whether your family qualifies for the advance credit.

The Child Tax Credit Update Portal allows you to verify your family’s eligibility for the payments and, if they choose to, unenroll, or opt out from receiving the monthly payments so they can receive a lump sum when they file their tax return next year. This secure, password-protected tool is available to any eligible family with internet access and a smart phone or computer.

You can opt out of monthly payments

Families can choose to opt out, or unenroll, from the advance payments over six months and receive the credit at the end of the year. The opt-out option may also appeal to taxpayers who would be eligible for the credit based on their 2020 return but know their 2021 income will be too high, making them ineligible. If a family receives advance payments but ends up not being eligible because their 2021 income is too high, they will need to pay back those early disbursements when they file their 2021 return.

The IRS plans to hire more customer service representatives to handle an anticipated uptick in inquiries about changes to the child tax credit. But some tax accountants are already fielding inquiries.

At recent webinars hosted by CDH, P.C., an accounting firm headquartered in Itasca, Illinois, there has always been at least one question about the child tax credit, says Naoko Lech, tax principal at the firm. Taxpayers want to know about the timing and amount of the credit, Lech says, and many don't know they can opt out of receiving advance payments.

Some clients are unaware that they may need to return some or all of the credit if their 2021 income exceeds the maximum threshold, thinking the credit is similar to the economic impact payments, or stimulus checks, which did not have to be repaid.

"That usually surprises the taxpayer, because they think this is just a rebate,” says Lech.

Lech explains to clients that if they need the money now and are unsure about what their 2021 income will be, they can take the advance payments in the second half of the year. But they should realize that if this year's income is too high, they will owe money when they file their 2021 return. If taxpayers know their 2021 income will be too high for the credit, they may prefer to opt out of the advanced payments, Lech says.

But Neil Becourtney, a tax partner at CohnReznick in New Jersey, doesn't expect many people to opt out of the advanced payments. “I can't really fathom why anyone would go out of their way to take the IRS up on their offer to decline receiving these advanced payments,” says Becourtney. “I don't think very many people are going to delve into it with that much analysis.”

Also, having income above the threshold does not mean money will be owed next April, notes Becourtney. If a taxpayer's wages increased, it is likely their federal withholding also went up, or maybe their itemized deductions are higher, he says.

But taxpayers will be in something of a predicament, as Becourtney puts it, if they get the advance payments, spend the money, become ineligible for the credit and then don't have the cash to pay the IRS back next April. “But, again, I doubt very many people are going to have such foresight to figure that all out and say, ‘Wow, I better halt these payments and not accept them,’ “ Becourtney says.

Sharon Waters, a former CPA, has written for Wired.com and other publications.