Changes to the Child Tax Credit: What You Need To Know
The American Rescue Plan Act (ARPA), signed into law earlier this year, was designed to help families and businesses survive the COVID-19 pandemic. Among other relief efforts, the new legislation expanded the Child Tax Credit from $2,000 per child to $3,000 per child for children 6 years and older ($3,600 per child under 6). It also made 17-year-olds eligible for the credit, provided for the credit to be fully refundable, and dictated that that it will be delivered to families throughout the year as a prepayment of the credit.
On July 15, 2021, the IRS issued the first of six monthly Child Tax Credit payments. Currently, the payments are scheduled for July 15, Aug. 13, Sept. 15, Oct. 15, Nov. 15, and Dec. 15. This schedule differs from the 2020 tax credit payment schedule – and it’s not the only change taxpayers need to be aware of.
The IRS is planning on direct depositing the advance payments when they have direct deposit information. It will be direct deposited to the same bank account in which any refunds would be direct deposited. The advance payments are not considered to be income, and there will not be tax imposed on the payments.
Taxpayers are deemed eligible for the credit based on the following criteria:
- The credit is based on the individual income tax return filed for tax year 2020 – or in some cases, 2019 if 2020 has not been filed or processed – and taxpayers are automatically enrolled to receive half of the credit that the IRS expects them to claim on their 2021 income tax return.
- The child tax credit has an income cutoff of $75,000 for single taxpayers and $150,000 for joint filers. The payments will be reduced by $50 for every $1,000 of income above those limits. The payments phase out entirely for single taxpayers earning $95,000 and joint filers earning $170,000.
- The individual income tax return must show one or qualifying children that are age 17 or younger.
When Advance Payments May Be Disadvantageous
Each taxpayer needs to carefully analyze whether the advance child tax credit payments are advantageous based on their individual circumstances. While it may be a welcome and needed cash infusion for some people, there can be significant consequences for others that need to be considered. Variables that may deem the advance payments to be disadvantageous to a taxpayer include:
- The anticipated tax owed at the time of filing the 2021 return
- For taxpayers who historically owe tax or receive small refunds, receiving the advance payments now could result in less credits to offset their tax liability.
- In some cases, foregoing advance payments in favor of greater offset credits could save a taxpayer from underpayment penalties and interest due to a balance owed upon filing.
- Changes in eligibility from 2020 to 2021:
- The payments are determined based on prior year filings. Taxpayers whose income increased in 2021 may no longer be eligible to claim the credit to the extent they could in 2020.
- Taxpayers who claimed a qualifying child in 2020 that cannot be claimed in 2021 should ensure that they receive no payments for the credit. If the total payments received in 2021 exceed the allowable credit for the year, the excess must be repaid to the IRS in most circumstances. This is especially important to consider in divorce situations where there is shared custody and the right to claim the qualifying child flips between parents each year.
Unenrollment, Re-Enrollment, and Updating Information
The IRS has created a portal that will allow taxpayers to update their bank information and opt-out of the credit: Child Tax Credit Update Portal. Taxpayers who have unenrolled and wish to re-enroll, as well as those who would like to update information – address, marital status, number of dependents, or AGI – affecting their eligibility may do so using the portal at some point in the future. The IRS has communicated a “late summer” goal, but a specific date has not been communicated. It is especially important to note that married taxpayers who unenroll must both complete the process, as enrollment is on an individual basis. There is a delay between the timing of any updates and when they take effect, so please make sure to update any required information as soon as the relevant portal features become available.
Lastly, any taxpayer who receives an advance Child Tax Credit payment will be issued Letter 6419 by the IRS in January 2022, which will provide the total amount of advance payments that the taxpayer received. This amount will be relevant for reporting on the 2021 individual income tax return. As with any other tax form or documentation issued after the close of a tax period, it is important to maintain a copy and provide your tax preparer with the information.
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COVID-19 relief legislation is constantly evolving. Taxpayers need to closely consider these changes when thinking about tax planning. Please reach out to your KSM advisor for help determining how these changes apply to you, or complete this form.
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