The child tax credit changes discussed below are for 2021 only! Remember, unlike the stimulus provisions, if you receive more child tax credit than you were entitled, you will be required to pay it back!
The American Rescue Plan includes an increased child tax credit from $2000 per child in 2020 to:
- $3600 – Children under age 6
- $3000 – Children ages 6 – 17
Not all taxpayers will qualify for the increased child tax credit. The Child Tax Credit begins to be reduced back to $2000 per child if your modified AGI in 2021 exceeds:
- $150,000 if married and filing a joint return; or
- $112,500 if filing as head of household; or
- $75,000 if filing single or are married filing a separate return.
As in the past, The Child Tax Credit begins phasing out for taxpayers with modified AGI exceeding:
- $400,000 if married and filing a joint return; or
- $200,000 for all other filing statuses.
Here is where it gets dicey. The new child tax credit includes an advance payment of one half of the expected child tax credit with payments beginning July 15th. The payments will equal half of the amount of your estimated Child Tax Credit divided into monthly payments. Clients eligible for the full Advance Child Tax Credit will receive the following amounts monthly:
- Children under age 6 – $300 ($3600 multiplied by 5%, divided by 6)
- Children ages 6 – 17 – $250 ($3000 multiplied by 5%, divided by 6)
- You might have to repay the payments! And,
- Even if you do not have to repay the payments, your 2021 refund might be lower than normal because you effectively will have received a part of your refund via these advanced payments!!!!
The IRS is using the most recent filed return (2019 or 2020) for the advanced payment determination. Many of our clients had lower income in 2020 due to the pandemic. If your 2021 income has increased above the threshold limits, you will have to repay the IRS some or all of the advance payments when you file your 2021 tax return. Our office strongly recommends that clients opt out of the Advance Child Tax Credit and simply collect the correct amount of credit when they file their 2021 return. The opt out function is available on the Advance Child Tax Credit portal located on the IRS website, IRS.gov. Married clients must each opt out of the advance child tax credit payments.
Here is a great example of how the advanced credit payments can bite you. If you, subject to a divorce decree, claim children in alternate years, how will the IRS handle your 2021 tax return when the child is on your return but your ex received the advanced credit (because he/she claimed the child the previous year)? The IRS, through FAQs, is instructing that the payments follow the child – meaning you will have to include the payments your ex received on your return to properly account for your child tax credit. Well now isn’t that peachy! You will be required to rely on your ex’s word to properly file your return. What could possibly go wrong? Good grief!
This is but one example among many that could severely delay your return being timely processed.
As mentioned earlier, but it bears repeating, the Advance Child Tax Credit payments must be reconciled on your 2021 tax return. It will be necessary for you to provide us the exact amount of the advance payments. Failure to do so will cause lengthy delays in the processing of your return and delayed refunds. To make matters worse, The IRS will not provide an advance child tax payment information tracking tool for tax preparers.
Important: The Manage Payments tool on the website IRS.gov allows you to check the status of your payments, unenroll from the advance payments and update your bank account information. IRS.gov/childtaxcredit2021