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Child Tax Credit – Advanced Payments

by Derek Loucks, CPA June 24th, 2021     |     Share   

The American Rescue Plan Act (ARPA) passed by Congress on March 6, 2021 temporarily increased the Child Tax Credit, for 2021 only, from $2,000 per qualifying child to $3,000 per qualifying child age 6 to 17 and $3,600 per qualifying child under the age of 6. ARPA also required the IRS to pre-pay 50% of the credit to those taxpayers who qualify starting July 15, 2021 and continuing each month through December 15, 2021. The remaining 50% of the Child Tax Credit would then be claimed by the taxpayer on their 2021 tax return (filed in early 2022). 

Lets look at who qualifies, how the advanced payments will work, and what to watch out for. 

WHO QUALIFIES: Taxpayers filing jointly qualify for the new credit amounts if their adjusted gross income is below $150,000. If filing as single the threshold is $75,000 and if filing as head of household the threshold is $112,500. The credit begins to phaseout by $50 for each $1,000 of income over the threshold. 

Taxpayers with children ages 0-5 as of 12/31/2021 qualify for $3,600 per child. Taxpayers with children ages 6-17 as of 12/31/2021 qualify for $3,000 per child. 

Taxpayers over those income thresholds still qualify for the old Child Tax Credit amount of $2,000 per child age 0-17 as of 12/31/2021 if their income is below $400,000 for joint filers or $200,000 for single or HOH filers. The credit begins to phase out for income over those thresholds. 

HOW THE PAYMENTS WORK: The ARPA requires the IRS to pay 50% of these child tax credits in advance to those who qualify based on their most recently filed tax return starting July 15, 2021 and continuing through December 15, 2021. For those who qualify for the full payment of the new amount, the monthly amount will be $300 for those ages 0-5 and $250 for those ages 6-17. If qualifying for the old amount the monthly payment will be $166.67 for ages 0-17. The payments will be direct deposited for those taxpayers who had their federal refund direct deposited on their 2020 tax return. The payments will be mailed by check or prepaid debit card for those taxpayers who opted for a mailed refund. 

WHAT TO WATCH OUT FOR: There are a number of scenarios taxpayers need to be aware of if receiving the advanced child tax credits. 

  1. You will claim fewer credits on your tax return than in past years: In past years qualifying taxpayers received a child tax credit of $2,000 per child age 0-16. On the 2021 tax return (filed in early 2022) taxpayers qualifying for the new amount will now only claim a $1,500 child tax credit or $1,800 for those ages 0-6 since 50% of the credit was pre-paid. If you have 3 kids ages 6-17 this could result in $1,500 less of a refund or you may even owe on your return. 
  2. You may have to repay some of the credits if your income is too high: The pre-payments are calculated based on your 2020 tax return. If your 2020 income was under the thresholds to qualify for the credits, but your 2021 income is over the thresholds you will be required to repay the advanced credits you received on your 2021 tax return. If you have 3 kids ages 6-17 this could result in a $4,5000 repayment on your 2021 tax return.  
  3. The IRS has created a Child Tax Credit portal for those taxpayers who wish to opt out of receiving advanced credits and would prefer to claim on their 2021 tax return (filed in early 2022). You can find the portal here: https://www.irs.gov/credits-deductions/child-tax-credit-update-portal

**Please note that if you are opting out and file a joint return that each spouse must complete the opt out process. If only one spouse completes you will still receive half of the advanced payment. To complete the opt out process you will also need to have a smart phone or web cam and a drivers license to prove identity. Expect the process to take 20 minutes for each opt out. 

The IRS is required to send a written statement to each taxpayer who received advanced credits by January 31, 2022 stating the total advanced credits paid. Please retain this document with your tax records. 

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Derek Loucks, CPA

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