In March 2021, the American Rescue Plan expanded the Sec. 24 Child Tax Credit in several ways. The amount of the credit was increased from $2,000 per child to $3,000 ($3,600 for children under 6 as of 12/31/2021) and the qualifying age was raised to children under 18 years old as of 12/31/2021. The increased credit amount phases out for taxpayers with incomes over $150,000 for married taxpayers filing jointly, $112,500 for heads of household, and $75,000 for others. A plan to advance payment of a portion of the credit was also included, to be calculated based on prior returns and paid out to eligible taxpayers beginning during 2021.
On or around July 15th, the IRS will begin advancing estimated child tax credit to taxpayers, continuing the advance payments monthly through December 2021. The total advance received over the 6 month period will represent half of a taxpayer’s total estimated total child tax credit.
Unlike the economic stimulus payments of 2020 and 2021, advance child tax credit payments are an advance of a credit you may or may not be eligible for, estimated based on prior year tax returns. While stimulus payments were structured in such a way that there was no possibility for repayment liability, there is potential requirement for child tax credit advance payments to be fully or partially repaid upon filing of 2021 tax returns.
Although there is an option for taxpayers to “opt-out” of the advance payments via an online portal provided on the IRS website, it is a somewhat involved process of identity verification (required to be fully and separately completed by both spouses in the case of a married filing jointly tax return). Rather than going through this process, a better option for those who are not in emergent need of the advance might be to leave the payments in a savings account or similar untouched fund until eligibility is finalized during the 2022 filing season.
When you file your 2021 tax return, you will need to compare the total amount of the advance Child Tax Credit payments received in 2021 with the amount of the Child Tax Credit that can be properly claimed on your 2021 tax return. If the amount of your Child Tax Credit exceeds the total amount of your advance Child Tax Credit payments, you can claim the remaining amount of your Child Tax Credit on your 2021 tax return. But, 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 year, you may need to repay to the IRS some or all of that excess payment.
Currently, the expanded child tax credit is modified for the 2021 tax year only, but is predicted to be extended into coming years under the Biden administration.
Reach out to your JHM contact today for further questions and clarification.