News & Insights

The American Rescue Plan Act (ARPA) of 2021 added several significant changes to the Child Tax Credit for 2021. Some of the changes include:

• Increasing the credit from $2,000 to $3,000 per eligible dependent age 6-17 at the end of 2021
• Increasing the credit from $2,000 to $3,600 per eligible dependent age five and under at the end of 2021
• 17-year-old dependents are now eligible for the credit
• Making the credit fully refundable for 2021
• Adding a Non-Filer option for low-income families to qualify for the credit

One of the most significant changes to the 2021 Child Tax Credit is that eligible families can receive up to half of the credit in advance during the second half of 2021. The payments are an advance on the amount of the Child Tax Credit that families can claim on their 2021 tax return. The payments will be made monthly starting on July 15 and go through December 2021. The maximum advance payments will be $300 per month for each dependent age five and under and $250 per month for each dependent age 6 to 17.

Advance Payments

In June of 2021, the IRS sent out Letter 6,417 to taxpayers eligible for the advance Child Tax Credit payments based on their 2019 or 2020 tax return. The letter details the amount of estimated advance Child Tax Credit monthly payments that will be sent automatically. The amounts for these advance payments are estimated based on 2020 tax returns. If the 2020 tax return has not been processed by the payment date, the advance payments will be calculated using the 2019 return. Once the IRS has processed the 2020 return, they will recalculate the advance payments and adjust any remaining monthly payments accordingly. Taxpayers qualify for the advance payments if they have a qualifying child and if their main home is in one of the 50 states or District of Columbia for more than half of the year.

Low-income families or families with $0 income who were not required to file a 2019 or 2020 tax return can use the online Non-Filer tool to file a simplified tax return. This tool will help low-income families register for the advance Child Tax Credit payments and the third economic impact payment and claim the 2020 Recovery Rebate Credit.

Families can also choose to elect out of the advance Child Tax Credit payments by updating the Child Tax Credit Update Portal. The Portal is available online on the IRS website for those families who want to opt-out of the advance payments. Those who opt-out will instead receive the total amount of the credit when they file their 2021 tax return. The Portal initially will only allow you to opt-out of the advance payments. Later this year, capabilities will be added to the Portal for taxpayers to update additional information. Items that can be updated include mailing address, bank account information, number of qualifying children, change in marital status, and change in income. If you expect your 2021 income to be significantly different from your 2020 income, the IRS is urging taxpayers to make updates on the Child Tax Credit Portal.

Eligibility/Qualifications

If taxpayers are eligible, they should not need to do anything to start receiving the advance Child Tax Credit payments. The payments should be sent automatically based on the qualifying information from their 2019 or 2020 tax return. If the IRS has banking information from previously filed tax returns, the advance payments will be sent via direct deposit. If they do not have bank account information, the payments will be sent by mail.

There are two phase-out limits for the 2021 Child Tax Credit. The first reduces additional tax credit ($1,600 or $1,000 in addition to the usual credit) down to the $2,000 credit per dependent child. The second phase-out limits the $2,000 credit down to zero. The maximum credit is phased out at modified Adjusted Gross Income (AGI), beginning at $75,000 for single, $112,500 for head of household, and $150,000 for married filing jointly. The second phase-out begins if your 2021 modified AGI exceeds $400,000 if married filing jointly or $200,000 for all other filing statuses. The credit amount is reduced by $50 for every $1,000 in additional modified AGI above the phase-out limits.

Considerations for 2021 Tax Returns

The advance Child Tax Credit payments are not considered income and are not taxable. They are an advance of the Child Tax Credit that will be claimed on your 2021 tax return. However, the advance Child Tax Credit payments are made based on an estimate of the credit you can claim on your 2021 tax return. Therefore, if the total amount of advance Child Tax Credit payments you received during 2021 is greater than the total credit you are allowed to claim on your 2021 tax return, you may have to repay the excess amount on your 2021 tax return.

In January of 2022, the IRS will send out Letter 6419 that will list the total amount of advance Child Tax Credit payments that were paid to you during 2021 in order to assist in filing your 2021 tax return. When filing your 2021 tax return, you or your tax preparer will compare the total amount of the advance Child Tax Credit payments received during 2021 with the amount of the Child Tax Credit you can properly claim on the 2021 tax return. Any differences will result in either claiming the remaining amount of the Child Tax Credit on your 2021 return or repaying the IRS for excess payments received. The excess amount will be reported on the 2021 tax return as additional income tax, which will reduce the amount of your income tax refund or increase your total tax due for 2021.

Repayment Protection

If taxpayers find themselves in a situation where they received more advance payments than credit allowed on their 2021 tax return, the IRS is offering repayment protection for taxpayers who qualify. If you qualify for repayment protection, the tax liability from excess payments is reduced by up to the full repayment protection amount. The full repayment protection amount is $2,000 multiplied by the number of qualifying children used to estimate the advance Child Tax Credit payments minus the number of qualifying children on the 2021 tax return used to calculate the allowed amount of Child Tax Credit.

Your modified AGI limits the repayment protection amount. Taxpayers qualify for full repayment protection if their main home was in the United States for more than half of 2021 and their modified AGI for 2021 is at or below the following thresholds: $60,000 if married filing joint, $50,000 for head of household, and $40,000 if single or married filing separately. Taxpayers won’t qualify for any repayment protection if their modified AGI is at or above $120,000 if married filing joint, $100,000 if head of household, and $80,000 if single. The repayment amount will be limited if your AGI is between these minimum and maximum thresholds.

Taxpayers can use the IRS website to opt-out of the advance Child Tax Credit Payments or to use the Non-Filer tool.

Sources:
https://www.irs.gov/credits-deductions/child-tax-credit-non-filer-sign-up-tool
https://www.irs.gov/credits-deductions/2021-child-tax-credit-and-advance-child-tax-credit-payments-frequently-asked-questions
https://www.irs.gov/newsroom/irs-offers-overview-of-tax-provisions-in-american-rescue-plan-retroactive-tax-benefits-help-many-people-now-preparing-2020-returns