As part of the American Rescue Plan Act that was signed into law in March, the IRS is required to assist taxpayers with children by making periodic, and non-taxable, advance payments from July through December of 2021. These payments will be equal to half of what the IRS estimates eligible taxpayers will receive in child tax credit when they file their 2021 return next year in 2022.
Letters were/are being sent to families, based on their 2019 or 2020 filed returns Adjusted Gross Income (or who used non-filer tools to register for economic impact payments), letting you know of your eligibility and an estimate of what the monthly payment will be.
Payments will begin being direct deposited or sent via paper check starting July 15th and will arrive every month around that time depending on weekends and holidays. So when you see a deposit in your bank account from the IRS and you may not be sure why, it's the Child Tax Credit advance payment.
The IRS says that a written notice (Letter #6419) will be delivered to taxpayers receiving the advanced payments no later than January 31, 2022 that shows the total amount of the payments made to the taxpayer during the calendar year. You should definitely keep those letters and provide them to us at tax time. We also recommend that you verify the amount on the letter to actual payments to make sure they are accurate.
The Child Tax Credit (CTC)
The American Rescue Plan raised the maximum CTC in 2021 to:
- $3,600 per child for qualifying children UNDER the age of 6, and
- $3,000 per child for qualifying children between the ages of 6 and 17
A qualifying child is defined as:
- Being under the age of 18
- Can be claimed as a dependent, and
- Is a US citizen or national or a US resident
The new maximum CTC is available to taxpayers with a modified adjusted gross income of
- $75,000 or less for Single or Married Filing Separate filers
- $112,500 or less for Head of Household filers
- $150,000 or less for Married Filing Joint and Widow/Widower filers
You can find your modified adjusted gross income by looking at your 2020 tax return Line 11 of your Form 1040.
If a taxpayer's income exceed the above-mentioned thresholds, the additional amount above the normal $2,000 credit ($1,000 or $1,600 per child) is reduced by $50 for every extra $1,000 in modified adjusted gross income. In otherwords, you get less of the advance credit the higher your MAGI is over the threshold until eventually you don't get any of it. You will still be eligible for the normal CTC of $2,000 per child as long as your AGI is under $400,000.
Example 1: Jack and Diane have two children ages 5 and 7. Their MAGI is $148,000. They will receive the full amount for the advance payment.
Example 2: Sid and Nancy also have two children ages 5 and 7, however their MAGI is $180,000. They will receive no advance payment as their MAGI is above the $150,000 threshold out of the extra CTC. They will instead continue to receive the normal CTC of $2,000 per child.
Example 3: Roxanne has one child age 17. Her MAGI is $76,000. She will receive a lesser amount of the advanced payment each month.
For 2021, the entire credit is fully refundable, meaning taxpayers can still receive the credit even if they owe no federal income tax.
The advance payment will be up to:
- $300 ($3,600/12) per month for each qualifying child under age 6 and
- $250 ($3,000/12) per month for each qualifying child ages 6 to 17
The remainder of the credit will be applied to the 2021 tax return when it is filed in 2022.
Other provisions of the CTC:
- Advance payments do not apply to residents of Puerto Rico and American Samoa.
- In determining the advance amount the IRS will not factor in the death of a child if the death is known to the IRS at the beginning of the calendar year for which the estimate is made.
- The advance CTC is not subject to reduction or offset for past due child support, non-tax debt owed to federal agencies, past due state income tax, unemployment compensation debt, or any similar authority permitting offset. In addition, the advance can not be reduced or offset by other federal taxes subject to levy or collection.
To take a look at what your estimate for the advance payment would be, grab your 2020 tax return and head over to this estimate calculator. Remember this is an estimate and the official IRS amount could vary.
If you would like to opt out, or unenroll, from the advanced payments you can do so on the IRS website HERE. Non-filers who typically don't need to file a return but may be otherwise eligible for the advance payments can do so at the same link.
For divorced clients, the IRS is using either the 2019 or 2020 on file to determine the advance payment amounts. That means if as part of your divorce decree you alternate dependents on your tax return with your former spouse you may not be eligible to receive the advance payments based on whichever is the most previously filed tax return or you may receive small or larger amounts based on the ages of the allowable claimed dependents. For example, Joe and Jane are divorced. Joe claimed two dependents in 2020 and their ages were 5 and 6 while Jane got to claim one dependent aged 13. If Joe is eligible to receive the advance payment he will receive the payment for the two children and Jane, if eligible, will receive the payments for the one child even though Jane is legally obligated to claim the two children now in 2021. The same scenario would apply if there's only one dependent and alternating years. Whichever spouse claimed the child in 2020 get's the advanced payment.
If you receive a total amount of advance child tax credit payments that exceeds the amount of Child Tax Credit that you can properly claim on your 2021 tax return, you may need to repay to the IRS some or all of the excess payment or report the excess as additional income tax which will decrease your refund or increase your tax due.
You qualify for full repayment protection and won't need to repay any excess amount if your main home was in the US for more than half of 2021 and your MAGI is at or below the following for your 2021 return:
- $60,000 for Married Filing Joint or Qualified Widow/Widower
- $50,000 for Head of Household
- $40,000 for Single or Married Filing Separate
You won't qualify for any repayment protection on excess advance payments if your MAGI on your 2021 return is:
- $120,000 for Married Filing Joint or Qualified Widow/Widower
- $100,000 for Head of Household
- $80,000 for Single or Married Filing Separate