The American Rescue Plan enacted in March this year provided for Advanced Child Tax Credit Payments in 2021. The IRS starts sending these payments out on a monthly basis beginning this week until the end of the year.
The Child Tax Credit payments are advances on 50% of taxpayers’ expected 2021 child tax credit. Increased for the 2021 tax year, the credit was raised from $2,000 to $3,000 (and to $3,600 for children under age six; but still subject to Adjusted Gross Income phase-outs). If you qualify for these payments and previously filed your 2020 tax return, you do not need to do anything. The payments will arrive automatically either by direct deposit or check. So, if you notice some unexpected deposits in your bank account soon, it might relate to these Advanced Child Tax Credit Payments.
Background
In 2020, the Child Tax Credit was $2,000 per dependent child. The American Rescue Plan raised the maximum credit as noted above, which is available to taxpayers with Adjusted Gross Income (AGI) of:
- $75,000 or less for singles;
- $112,500 or less for heads of household; and
- $150,000 or less for married couples filing a joint return and qualified widows.
- For taxpayers with AGIs above these levels, the credit is subject to phase-outs.
In addition, the Child Tax Credit is fully refundable for 2021. Thus, eligible taxpayers will receive this credit even if they owe no federal tax. The higher Child Tax Credit in 2021 will be obtained by taxpayers when they file their 2021 tax returns next spring.
Advanced Child Tax Credit Payment
The Advanced Child Tax Credit Payment will equal one-half the amount of your estimated 2021 Child Tax Credit. This amount is then divided by six to arrive at the monthly advance payments you will receive for the last six months of 2021. These payments are made now in the second half of 2021 on a monthly basis, so taxpayers do not need to wait until next spring to realize the savings. Let’s look at a few examples:
Married taxpayers with two children, ages four and two, and AGI in 2020 of $125,000. For each qualifying child ages five or younger, the Child Tax Credit is $3,600, for a total of $7,200. The advanced payment is determined as one-half of the expected Child Tax Credit for 2021, or $3,600 ($7,200 @ 50%). The $3,600 is divided by six (for six months in 2021 beginning in July) resulting in a monthly payment of $600.
Single taxpayer with one child, age 12 and AGI of $70,000 in 2020. For a qualifying child ages seven through 17, the 2021 Child Tax Credit is $3,000. One half of this is $1,500, and the monthly advanced payment in 2021 is $250 ($1,500 ÷ 6).
Reconciliation of Child Tax Credit with Advanced Child Tax Credit Payments
The Advanced Child Tax Credit Payments is an estimate of what a taxpayer is expecting for a Child Tax Credit in 2021. The actual credit could differ from this, due to changes in income for 2021 as well as changes in the number of dependent children. Therefore, when you file your 2021 tax return in the spring of 2022, you will need to compare:
- The total amount of the Advanced Child Tax Credit payments received during 2021, with
- The calculated amount of Child Tax Credit allowed on your 2021 tax return.
- Excess Child Tax Credit Amount: If the amount of your 2021 Child Tax Credit exceeds the total amount of your Advanced Child Tax Credit Payments, then you can claim the remaining amount of your Child Tax Credit on your 2021 tax return.
- Excess Advanced Child Tax Credit Payment Amount: If you receive a total amount of Advanced Child Tax Credit Payments that exceeds the calculated amount of your 2021 Child Tax Credit, you may need to repay to the IRS some or all of that excess payment. This would be done on your 2021 tax return.
Note: these payments are different than the Economic Impact Payments (EIP) sent out in 2020 and 2021 in that, if the taxpayer’s income is higher in 2021 than 2020 and they are not entitled to the Child Tax Credit (or less of a Child Tax Credit), then the Advanced Child Tax Credit Payment received in 2021 will generally need to be repaid. While, on the other hand, any excess EIP payments do not need to be repaid.
Opting Out of Advanced Child Care Tax Credit Payments
Some taxpayers may not want to receive these Advanced Child Tax Credit Payments during 2021, but would rather wait until they file their 2021 tax returns. If you would prefer not to receive monthly Advanced Child Tax Credit Payments because you would rather claim the full credit when you file your 2021 tax return (or you know you will not be eligible for the Child Tax Credit in 2021), you can unenroll through the Child Tax Credit Update Portal.
IRS Resources
There are many other provisions and special rules related to the Advanced Child Tax Credit Payments. The IRS has developed a number of tools and materials to assist taxpayers and tax practitioners in navigating this new payment. The following are several IRS resources that might be helpful for you:
- Advanced Child Tax Credit Eligibility Assistant: https://www.irs.gov/credits-deductions/advance-child-tax-credit-eligibility-assistant
- IRS on 2021 Child Tax Credit and Advanced Child Tax Credit Payments: https://www.irs.gov/credits-deductions/2021-child-tax-credit-and-advance-child-tax-credit-payments-frequently-asked-questions
- General Information from IRS on Advanced Child Tax Credits Payments: https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021
- 2021 Child Tax Credit and Advanced Child Tax Credit Payments Resources and Guidance: https://www.irs.gov/newsroom/2021-child-tax-credit-and-advance-child-tax-credit-payments-resources-and-guidance
- IRS Publication 5534 on the Advanced Child Tax Credit Payments: https://www.irs.gov/pub/irs-pdf/p5534.pdf
- IRS on Avoiding Tax Scams with the Child Tax Credit: https://www.youtube.com/watch?v=9PMDGmwl2Fc
Please also contact your Sikich tax advisor with any questions you have or assistance you need with the new Advanced Child Tax Credit Payment.
