Advance Payments of Child Tax Credits
The American Rescue Plan Act (ARPA) became law in March 2021. Prior to ARPA, taxpayers could claim a child tax credit (CTC) of up to $2,000 for each child under the age of 17. The CTC was reduced by 5% of AGI over $200K for single parents and $400K for married couples. If the CTC exceeded taxes owed, taxpayers could receive $1,400 as a refundable credit. For example, if a taxpayer had $0 of tax liability, he or she would only receive $1,400 for the CTC instead of $2,000 because the excess $600 is only offered to offset tax liabilities.
The ARPA revised the CTC by increasing the total credit to $3,000 for each child under 18 and $3,600 for each child under the age of 6. This provision allows 17-year-olds to be eligible for the CTC, who, prior to ARPA, were only allowed a $500 credit.
However, the additional CTC ($1,600 for children under the age of 6 and $1,000 for children 6 and older) is subject to different phase-out limits. The additional CTC will be reduced by $50 for every $1,000 in modified AGI in excess of $150,000 for joint filers, $112,500 for head of household, and $75,000 for other filers. However, if all of the additional CTC is phased out, the original $2,000 CTC is still subject to the original AGI limitations of $400,000 for joint filers and $200,000 for other filers. So, the CTC will have two different phase-out limits.
The ARPA directed the IRS to issue advance payments of the CTC based on 2019 or 2020 tax return information. These advance payments began on July 15, 2021 and will be for half of the total allowable credit. For example, if a taxpayer claimed three eligible children (age 5 – $3,600, age 7 – $3,000, and age 10 – $3,000), he or she would receive $4,800 of advance payments in 2021 and $4,800 on their 2021 tax return. These advance CTC payments are intended to be paid monthly and last for 6 months. So, using our example of the three children above (age 5 – $300 per month, age 7 – $250 per month, age 10 – $250 per month), the parents should receive payments of $800 per month between July and December 2021.
The IRS is basing these advance payments on a taxpayer’s 2019 or 2020 tax return. But, this credit will eventually be based on the 2021 tax return. If the 2019/2020 AGI allows a taxpayer to claim the CTC, but the 2021 AGI determines a reduced or $0 CTC, the taxpayer will likely be required to pay back the excess amount received during 2021. However, if a taxpayer receives advance payments for a child who they no longer claim in 2021 (ex: divorce situations), he or she will not be required to repay the total amount received if their AGI is below $40K for a single filer, $50K for head of household, and $60K for joint filers.
If the IRS believes you qualify for the advance payments, you do not have to do anything to receive them. They will automatically enroll you. Unfortunately, it is too late to unenroll from receiving the first payment; however, taxpayers have until August 2nd to unenroll before the next payment. If you want to opt out of future advance payments, you can do so at the IRS portal: https://www.irs.gov/credits-deductions/child-tax-credit-update-portal. Afterwards, you will be able to stop future payments, but not prior payments. The IRS indicates that it may take up to seven calendar days for unenrollment to process and encourages taxpayers to check back after unenrolling to make sure that the request was processed successfully. You can also use the portal to provide information regarding changes in income, marital status, and number of qualifying children.
The IRS is currently mailing letters with information about this topic. They have also provided a Frequently Asked Questions page on their website that includes more detailed information: https://www.irs.gov/credits-deductions/2021-child-tax-credit-and-advance-child-tax-credit-payments-frequently-asked-questions.
We hope this information is helpful to you. Please feel free to pass it along to your friends and family who may benefit from it as well.
CIRCULAR 230 DISCLOSURE:
In compliance with requirements imposed by the IRS pursuant to IRS Circular 230, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.