By: Anthony Warga, Semi-Senior Accountant & Dolly Rajani, Tax Supervisor
News about advance IRS payments of the Child Tax Credit, coupled with other changes, has understandably gotten many Americans excited, and potentially a bit confused. The changes the American Rescue Plan Act of 2021 enacted are a bit complicated, and the IRS does not have the full infrastructure in place at the time of writing, but here is what we know so far:
What is the Child Tax Credit?
The Child Tax Credit (CTC) has been around since 1997 and decreases taxpayers’ tax liability on a dollar-for-dollar basis depending on the number and age of the taxpayers’ dependent children, as well as the taxpayers’ adjusted gross income (AGI). For the 2020 tax year, the credit was $2,000 and began to phase out at $400,000 AGI for joint filers, and $200,000 AGI for everyone else. Up to $1,400 of this credit was refundable for certain lower-income individuals, meaning that if it exceeds the amount of tax owed, the taxpayer is entitled to a refund. However, a taxpayer needed to have at least $2,500 of earned income to be eligible for this refund. If you met these conditions in the past, you have likely already been benefiting from the CTC every tax year.
What is different about the Child Tax Credit in 2021?
In 2021, the American Rescue Plan expands the credit by allowing children ages 17 and under to qualify for the credit (up from age 16 in years prior), increasing the credit to $3,000 per child ($3,600 for those under age 6), making the credit fully refundable, and removing the earnings requirement to benefit from the credit.
Do all families qualify for the higher tax credit?
It is important to note that not all families that previously benefited from the CTC will get the higher CTC in 2021. The expanded credit starts to phase out for AGIs at $75,000 for single filers, $112,500 for head-of-household filers, and $150,00 for joint filers up to the previous limitations of $200,00 for single filers and $400,000 for the rest. For those filers with adjusted gross income between the two limitations, you will see a reduced (though still larger than before) credit. The amount of credit is reduced by $50 for each $1,000 (or fraction thereof) of AGI over the applicable amount. Note that this phaseout is limited to the $1,000 or $1,600 temporary increased credit for 2021 and not the original $2,000 credit that was allowed before the passage of the Act.
For example, if a married couple has one child who is four years old, files a joint return, and has an AGI of $160,000 for 2021, they will not get the full $3,600 enhanced credit. Instead, since their AGI is $10,000 above the phase-out threshold for joint filers ($150,000), their credit is reduced by $500 ($50 x 10) – resulting in a final 2021 credit of $3,100.
What happens if the taxpayer’s income is greater than the thresholds for claiming the additional child tax credit?
Families who are not eligible for the $3,000 or $3,600 credit in 2021, but who have AGIs at or below $400,000 on joint returns or $200,000 on other returns, could claim the regular credit of $2,000 per child, less the amount of any advance payments they get. Families with AGIs above the $400,000/$200,000 thresholds will see the $2,000 per-child credit reduced by $50 for each $1,000 (or fraction thereof) of AGI over those thresholds.
For example, if a married couple has one child who is seven years old, files a joint return, and has an AGI of $415,000 for 2021, they will not get the full $3,000 enhanced credit. First, because of their high income, they do not qualify for the extra $1,000 (see question above), so their credit is reduced to the regular amount of $2,000. Then, since their AGI is $15,000 above the second phase-out threshold for joint filers ($400,000), their credit is reduced again by $750 ($50 x 15) – resulting in a final 2021 credit of $1,250.
2020 vs. 2021 Child Tax Credit Comparison
|Maximum age of child||16||17|
|Credit amount per child||$2,000||$3,000 ($3,600 if under age 6)|
|Credit refundable?||Up to $1,400||Up to maximum amount|
|Minimum earned income required||$2,500||$0|
|Credit paid in advance?||No||50% paid in advance|
|AGI to qualify for full credit amount||$200,000 Single $200,000 Head-of-Household $400,000 Joint||$75,000 Single $112,500 Head-of-Household $150,000 Joint|
|AGI to qualify for reduced (pre-2021) amount – $2,000||N/A||$200,000 Single $200,000 Head-of-Household $400,000 Joint|
How do I get my Child Tax Credit advance payments, and how much will I receive?
Much like the stimulus checks of the past year and a half, these payments will be distributed by the IRS automatically, though this time in six monthly installments, with the first payments beginning on July 15th. The advance payments will account for half of the taxpayers’ 2021 CTC. The IRS will calculate the amount you will receive based on the AGI and qualifying dependents on your 2020 or 2019 tax return, whichever is most current.
For example, a family with two qualifying children between ages 7 and 17, whose AGI qualifies them for the higher credit amount, would be eligible for a $6,000 Child Tax Credit for 2021. Half of this would be paid in advance over six monthly installments of $500, and the remaining $3,000 would be applied when they file their tax return. If that family’s AGI instead only qualified them for the $2,000 per-child credit, they would be eligible for a $4,000 Child Tax Credit for 2021. They would receive half in six payments of $333 from July – December and would claim the remaining $2,000 when they file their 2021 tax return.
Do I have to pay tax on the payments?
No! These are advance payments of a tax credit that you would already be eligible for when filing your 2021 tax return, though you will need to reconcile the monthly payments you receive in 2021 with the CTC you are entitled to on your 2021 tax return (we can help with that!). The law requires the IRS to mail out a notice by January 31, 2022, showing the total amount of payments made to you during 2021. So, keep a look out for this letter from the IRS and save it for your 2021 taxes.
It should be noted that in some instances this could result in a smaller tax refund, or a larger tax amount owed when filing for 2021. For example, if in 2020 a family had two qualifying children, they would have received a $4,000 Child Tax Credit ($2,000 for each child), while that same family in 2021 (assuming the children are above age 6), would receive $3,000 in advance payments, and then a $3,000 Child Tax Credit on their return. While this change is obviously overall more beneficial to the family, it would result in less credit taken at the time of the tax filing, i.e., $3,000 credit on the return vs. $4,000 since the taxpayers would have already received $3,000 in advance. In instances where both parents work, where a person is self-employed, or in other specific circumstances, you may have been counting on this tax credit to cover your tax liability, and may now be underpaid. We encourage you to reach out to us if this situation applies to you, as this may change your 2021 estimated tax planning.
Do I have to pay back overpayments of the Child Tax Credit?
If at the time of filing your 2021 return it is discovered that you should have received less in advance payments than the IRS calculated, it is possible you will have to pay them back.
Taxpayers with 2021 adjusted gross income at our below $40,000 for single filers, $50,000 for head-of-household, and $60,000 for joint filers will not have to repay any overpayments. Taxpayers with 2021 adjusted gross incomes of at least $80,000 for single filers, $100,000 for head-of-household, and $120,000 for joint filers will need to repay the entire amount of any overpayment when they file their 2021 tax return. Those with an AGI in between these amounts will need to partially repay the overpayment.
What if my tax situation changed significantly since my last tax filing?
If you have significantly more or less income in 2021 than on your previous tax filing, if you had a child in 2021, if you don’t want the advance payments and want the whole credit applied to your return, or for whatever other reason you need to make changes to how the IRS is going to calculate your payments, the IRS will be developing an online portal that will allow you to do so. At the time of writing, this portal is not yet available, however the American Rescue Plan legally requires the IRS to do so by July 1st, 2021, and the IRS has confirmed it will launch by then.
Will the monthly payments be reduced for taxpayers who owe back taxes or child support?
No. The IRS cannot take the payments to offset past-due federal taxes, state income taxes, or other federal or state debts. The same goes for people who are behind on child support payments. However, there are no protections against garnishment by private creditors or debt collectors.
For additional details, make sure to visit https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021