What the Advance Child Tax Credit Means for 2021 Returns
For tax years beginning in 2021, the American Rescue Plan Act (ARPA) significantly expanded the child tax credit. It also implemented advance child tax credit payments, and a possibility that taxpayers may face a repayment obligation if the advance payments are too high. Taxpayers facing a potential repayment may wish to unenroll from these advance payments.
The Tax Cuts and Jobs Act raised the child tax credit from $1,000 to $2,000 per qualifying child for tax years 2018 through 2025. The TCJA also significantly expanded the phase-out threshold for credit eligibility, beginning the phase-out where modified adjusted gross income (MAGI) exceeds $400,000 for MFJ and $200,000 for other taxpayers. The credit has been refundable at $1,400.
The 2021 Child Tax Credit
For 2021 only, ARPA expanded the definition of qualifying child to include children under 18, instead of children under 17. For 2021, the ARPA also expanded the child tax credit to $3,000 per child and $3,600 for children under six for taxpayers within certain income thresholds.
The ARPA increase ($1,000 per child and $1,600 for children under six) begins to phase out where MAGI exceeds $150,000 for MFJ, $112.500 for head of household, and $75,000 for singles. The phase-out reduces the increase by $50 for each $1,000 by which MAGI exceeds the threshold amount.
The pre-ARPA $2,000 credit continues to phase out using the thresholds of $400,000 for MFJ and $200,000 for other taxpayers. The second phase-out reduces the Child Tax Credit by $50 for each $1,000 (or fraction thereof) by which modified AGI exceeds the income threshold.
For 2021, the entire child tax credit is refundable for taxpayers with a principal place of residence in the U.S. for more than one-half of the year or for residents of Puerto Rico. ARPA also eliminated the “earned income” requirement for low-income households, meaning that they are eligible for the entire credit, regardless of income.
For tax year 2021, a qualifying child is an individual who does not turn 18 before January 1, 2022, and who satisfies the following conditions:
- The individual is the taxpayer’s son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendant of any of them (for example, a grandchild, niece, or nephew).
- The individual does not provide more than one-half of his or her own support during 2021.
- The individual lives with the taxpayer for more than one-half of tax year 2021.
- The individual is properly claimed as the taxpayer’s dependent.
- The individual does not file a joint return with the individual’s spouse for tax year 2021 or files it only to claim a refund of withheld income tax or estimated tax paid.
- The individual was a U.S. citizen, U.S. national, or U.S. resident alien.
Parents are eligible for the credit if the child was alive at any time in 2021. The credit can be taken only for qualifying children who have a SSN valid for employment in the United States.
Advance Payment of Credit
ARPA instructed the Secretary of the Treasury to make advance periodic payments to eligible taxpayers equal to one-half of the taxpayers’ 2021 child tax credit. The advance payments were to be electronically deposited from July through December of 2021. IRS calculated eligibility for the advance credits based upon the 2020 return, if it had been filed. If there was no 2020 return on file, the credit was calculated based upon the 2019 return.
For those eligible for the entire amount of the enhanced credit, the monthly payment is $300 per child aged 5 or younger and $250 per child ages 6-17. For those fully eligible for the pre-ARPA credit only ($2,000), the advance monthly payment is $167 per child.
Advance Payment Schedule
IRS began making advance child tax credit monthly payments July 15, with additional deposits to be made every 15th of the month through the end of the year. The August payment was made on August 13 because the 15th fell on a Sunday.
Unenrolling from Advance Payments
Individuals who do not wish to receive credits may “unenroll” through an online portal. Each spouse must unenroll separately from the payments. Individuals may also use the online portal to update their bank account and mailing address information. In the near future, the online portal should allow individuals to make a change in the number of qualifying children or report a change in income or marital status.
Repayment May Be Required
Unlike the economic impact payments, the advance child tax credits may have to be repaid if an individual received more advance payments than the total child tax credit to which the individual will be entitled on the 2021 return. Taxpayers must consider reconciliation and either unenroll from the advance payment or change their information through the online portal to align the advance credit with actual 2021 information.
Reconciling the Credit
IRS has posted reconciliation instructions through FAQs on the IRS website. When parents file their 2021 returns they must compare:
- The total amount of the advance child tax credit payments that they received in 2021; with
- The amount of the child tax credit to which they are entitled on the 2021 tax return.
If the amount of the child tax credit calculated for the return exceeds the total amount of the advance child tax credit payments, the parent will claim the remaining amount on the 2021 return.
If the amount of the child tax credit calculated for the return is less than the total amount of the advance child tax credit payments, the practitioner will need to determine whether the individual is required to repay some of all of the excess payment.
Those with no repayment protection
Individuals who have MAGI at or above the following amounts will have to pay back the full amount of any overpayment of the advance child tax credit:
- $120,000 (MFJ or qualifying widow or widower)
- $100,000 (head of household)
- $80,000 (single or married filing separate)
Those with full repayment protection
Individuals with a main home in the United States for more than half of 2021 and MAGI at or below the following levels will have full repayment protection, although this doesn’t necessarily mean they won’t have to pay back some of the excess credit:
- $60,000 (MFJ or qualifying widow or widower)
- $50,000 (head of household)
- $40,000 (single or married filing separate)
Those above these income thresholds, but below the income thresholds for those with no repayment protection, will have partial repayment protection.
Those qualifying for full repayment protection will not have to repay any excess advance payments in an amount less than or up to the “full repayment protection amount,” which equals $2,000, multiplied by the following:
- The number of qualifying children the IRS took into account in determining the IRS’s initial estimate of the advance child tax credit payments, minus
- The number of qualifying children properly taken into account in determining the allowed Child Tax Credit amount on your 2021 tax return.
Tom and Jerri filed a joint return in 2020 and properly claimed the child tax credit for three qualifying children. The IRS calculated the advance credit based upon these three children. When they file their 2021 return, Tom and Jerri have $75,000 MAGI and only one qualifying child. Tom and Jerri have two excess qualifying children. Full repayment protection for Tom and Jerri would be $4,000 ($2,000/child). Their income, however, is more than $60,000, the MAGI at which full repayment protection begins to phase out. Based upon their income, Tom and Jerri are 25% percent into the phase-out range for the repayment protection. As such, their repayment protection amount is reduced by 25% to $3,000.
Tom and Jerri received $300/month ($1,800) payment for one of the children and a $250/month for the other child ($1,500), for a total of $3,300 in advance payments for children that are not their qualifying children in 2021.
When they file their return, they will owe $300 as a repayment, after subtracting their $3,000 repayment protection. Had they made $120,000 in 2021, they would have owed the entire $3,300 as an additional tax.
Shared Custody Situations
Parents who alternate claiming a child for the child tax credit will face an advance child tax credit repayment if 2021 is not their year to claim the child. The parent entitled to claim the child in 2021 will be able to claim the full amount of the child tax credit for the child on the 2021 tax return, even if the other parent received the advance child tax credit payments. Even if the parent not entitled to claim the child in 2021 does not unenroll from receiving the advance payments, that decision will not affect the other parent’s ability to claim the credit on their return.
Notice from IRS
To help with the reconciliation, IRS will send individuals who received advance child tax credit payment a Letter 6419 in January of 2022, providing the total amount of payments disbursed in 2021.
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