You may have heard about recent changes to the Child Tax Credit, including the fact that some taxpayers will start receiving checks in July. Back in March, Congress passed the American Rescue Plan Act (ARPA) which made significant changes to the 2021 Child Tax Credit (CTC). While the IRS is still releasing information about these changes, here’s what we know at this time:
The changes to the tax law are not permanent. The ARPA only guaranteed funding for changes to the CTC for tax year 2021 (the return you will file in spring of 2022). Without additional Congressional action, the credit reverts to the old rules after this year.
The CTC will now apply to children aged 17 and younger. Previously, the age limit was set at 16.
The amount of the credit will be increasing for some taxpayers. Previously, taxpayers claiming children aged 16 or younger could qualify for a credit of up to $2000 per child. For 2021, children 5 and younger may qualify for up to $3600, while those age 6 – 17 may qualify for a credit of up to $3000.
Your Adjusted Gross Income (AGI) will determine if you qualify for these increased amounts. To qualify for the new amounts, your AGI must be less than $75,000 if your filing status is Single or Married Filing Separate, $112,500 if your filing status is Head of Household, and $150,000 for Married Filing Joint. Above these thresholds, the credit is reduced $50 for every $1000 of income.
Although the changes affect the 2021 CTC, eligible taxpayers will start receiving monthly advanced payments by July 15 of this year. The ARPA sought to get additional funds to those who may still be affected by the economic downturn caused by Covid, so it directed the IRS to make advanced payments on the CTC to eligible taxpayers. Those with qualifying children 5 or younger will get $300 per month per child; those with qualifying children 6 or older will get $250 per month per child.
The rules for claiming a child as your dependent have not changed. The same rules you followed last year to be able to claim a child are still in place.
Although getting extra money each month sounds great, there may be a downside. The payments are an advance on the CTC you will claim on your 2021 return. Receiving the money now means it will not be available as a refund when you file your 2021 return. Many taxpayers will receive smaller refunds or possibly even owe money when they file their 2021 return. Kiplinger has a great calculator to determine how much your monthly payment will be and how much remaining CTC you can take on your 2021 return. It can be found here.
And that’s not all. The advance payments will be based on information on your last tax return. If your 2021 return will not show the same number of children qualifying for the CTC (for example, you alternate claiming the child with their other parent, and 2020 was your year) you will receive payments in error. If the actual CTC calculated on your 2021 return is less than the advance payments you’ve received, you will be required to repay the money as part of your 2021 tax return.
There is a “Safe Harbor” in place. Single taxpayers with AGI under $40,000 ($60,000 for MFJ) will not be required to repay any advance payments for which they are not qualified.
Taxpayers will be allowed to opt out of the advance payments. And we expect many taxpayers to make this choice! The IRS has promised to have a portal on its website by the end of June that taxpayers can use to opt out of these advance payments. The portal will also allow taxpayers to update their information affecting the CTC. Whether you had a new baby in 2021 or you will no longer be claiming a child you included on your 2020 return, you will be able to update the IRS so they can adjust the advance payment to reflect your current situation.
A “Non-filers” portal is now open on the IRS website. This is for people who DO NOT meet the requirements to file a tax return to give the IRS their information to receive the payments. Taxpayers who file tax returns should NOT use this portal. This is NOT the “opt out” portal. We will keep our clients updated on this with Facebook posts and additional blogs.
Down South clients do not have to navigate these changes on their own. Everyone’s tax situation is different, so we can’t just say “Take the money” or “Opt out”. However, we are here to answer your questions and guide your decisions based on your individual circumstances.