Explainer: How Enhanced Child Tax Credit Will Affect Your Taxes

The Internal Revenue Service (IRS) building is seen in Washington on Feb. 19, 2014. (Jim Watson/AFP/Getty Images)

The Biden administration on Monday announced it would start to distribute advance payments associated with the enhanced child tax credit starting on July 15, with millions of eligible Americans set to receive the money automatically or able to opt out and get it as a lump sum when they file a tax return in 2022.

The $1.9 trillion American Rescue Plan both boosted the amount eligible families could receive in 2021 and allowed for half of the money to be made available in monthly instalments through the end of the year, with the remainder claimed as a credit when people file their income taxes next year.

Since the advance payments mean that eligible individuals will see a smaller tax refund when they file next year, the Internal Revenue Service (IRS) said that people will have the opportunity to decline receiving advance payments. The agency said it would soon publish details about the opt-out.

For the current tax year, eligible families claiming the credit will receive up to $3,000 per qualifying child between ages 6-17 and $3,600 for each child younger than 6. Under the prior law, the tax credit was up to $2,000 per qualifying child under age 17.

The advance payments will amount to up to $300 per month for each child under 6 and up to $250 per month for children between the ages of 6 and 17.

The expanded portion of the tax credit will begin to phase out for individuals earning more than $75,000 a year, $112,500 for heads of household or $150,000 for those married taxpayers filing jointly. The $2,000 credit starts phasing out at incomes of $200,000 and above for individuals and $400,000 for couples.

Around 39 million households, covering 88 percent of children in the United States, are slated to begin receiving the monthly payments automatically, Treasury said in a release. Families that don’t have direct deposit will receive the payment either as a paper check or a debit card.

The credit is fully refundable, meaning that taxpayers who don’t have any earned income or don’t owe any income taxes will also benefit. Under the prior law, $1,400 of the $2,000 credit was refundable.

Ken Corbin, the IRS chief taxpayer experience officer, said at a May 14 tax conference that the IRS will send taxpayers notices about the size of their child tax credits at the end of the year, along with information they can use to reconcile those amounts on their 2021 tax returns that will be filed next year.

The expanded child tax credit is only available in 2021, although President Joe Biden has called on Congress to make it permanent. The American Families Plan, which is backed by most Democrats in Congress, would extend most of the child tax credit expansion until 2025.