Whether you are a new parent or an old hand at child-rearing, parents know that raising children isn’t easy or cheap. Whether it’s for nappies and formula at the beginning, through the toy phase, or the teenage years where the expenses never end, parenting is not a job for the faint of heart. Of course, the benefits can be priceless.
But what about the tax benefits?
If you’re already a parent, you probably already know about the Child Tax Credit (CTC) you can claim for your children on your tax returns (and if you’re a new parent, congratulations! Now’s the time to sit up straight and pay attention). The Child Tax Credit has been around for many years and was raised to $2,000 per qualifying child under the Tax Cuts and Jobs Act of 2017. But did you know that, for 2021, the credit was significantly increased, and part of it may have been paid to you in advance?
The following are the temporary changes enacted for 2021:
- The age of a qualifying child has been raised from “under 17” to “under 18” years of age at the end of 2021;
- The maximum credit amount was raised to $3,000 for qualifying children aged 6 to 17, and $3,600 for children under 6 years of age (sometimes referred to as the Enhanced Child Tax Credit);
- There is now a two-tier phase-out of the CTC, which reduces the enhanced CTC down to the regular CTC for high-income taxpayers;
- A portion of the credit is payable in advance in monthly installments for 2021;
- For many taxpayers, the credit will be fully refundable, meaning you don’t have to have a tax liability larger than your credit to get the full benefit of the credit.
- The credit has been expanded to taxpayers in Puerto Rico, although they are not eligible for the advance payments. Taxpayers in some other U.S. Possessions may also qualify.
- The credit is now calculated on Schedule 8812, which was used in previous years only for the Additional Child Tax Credit.
Advance Payment of Child Tax Credit
Perhaps the most significant change for the 2021 tax year is that taxpayers who claimed a Child Tax Credit in 2020 may be eligible to receive advance payments of one-half of their anticipated 2021 Child Tax Credit during the last half of 2021. To be eligible for the advance payment, you (and your spouse, if a joint return) must meet certain qualifications, such as having claimed the Child Tax Credit on your 2020 tax return (or 2019 if you did not file a 2020 return), an income under certain limits, and a main home maintained in the United States.
The payments are made in advance via direct deposit by the IRS from July 2021 to December 2021. If a direct deposit cannot be made, the IRS will issue a paper check to the taxpayer’s last known address. The maximum amount of advance payment is 50% of the estimated allowable Child Tax Credit for 2021. The payments will be made in six equal installments.
Example: Terry and Jeri are a married couple with three children, all between the ages of 6 and 18. Their adjusted gross income for 2020 was $140,000, so their allowable 2021 Child Tax Credit would be $9,000 ($3,000 times 3 children). The IRS will make monthly deposits of $750 from July to December 2021 ($750 * 6 months = $4,500), and they will claim a Child Tax Credit on their return of $4,500.
The advance Child Tax Credit amount will not be reduced for any overdue taxes from previous years for federal or state taxes that you may owe but, if your 2021 return calculates an additional refund, any remaining Child Tax Credits may be used to pay off these debts. The advance payments are also not reduced for any past-due child support owed by the taxpayer. However, they are subject to garnishment by non-federal creditors (such as for private party judgments, restitution, or other court-ordered debts), but many states and financial institutions may act to protect the payments from seizure.
The IRS will issue Letter 6419 in January to provide the total amount of advance credit that was paid to the taxpayer to assist in the preparation of their return. It is important to keep this letter so that you can properly prepare your 2021 federal tax return!
When you file your 2021 federal tax return, you will need to reconcile the amount of any advance Child Tax Credit you received with the amount you can properly claim on your tax return. If you received too much Child Tax Credit in advance, you might be required to
pay all or a portion of the credit back to the IRS – so it is important that you inform the IRS of changes in your family situation which may change the amount of the credit that you are entitled to. You can inform the IRS of family changes through the
Child Tax Credit Update Portal. You can also use this portal to opt out of the advance monthly payments.
Situations that may require adjustments to the advance payment amounts include the following:
- Increases in income which put you over the applicable thresholds;
- A qualifying child who resided with you in previous years changing homes during 2021 and residing more than half the year in another home;
- Divorced couples who claim children on an even/odd annual basis (for example, if one spouse claims the child on their 2020 return, the IRS will issue the advanced CTC to that spouse, but the other spouse may be claiming the child on the 2021 return);
- Birth of a qualifying child during 2021 (the death of a qualifying child in 2021 would not disqualify the taxpayer from the credit);
- Filing status changes, such as marriages, separations, or divorce;
- Moving out of the United States for more than half of 2021;
For more information on whether you qualify, refer to the IRS’s FAQs on the Child Tax Credit
here.
Does the credit need to be repaid if I get too much?
Yes, but there are some exceptions. To prevent lower-income taxpayers from having to repay all or part of their Child Tax Credit if they receive too much in advance payments, lower-income taxpayers may qualify for full or partial “repayment protection.” This is based on your AGI and, for full protection, your AGI must be below $60,000 for married filing joint and qualifying widow(er), $50,000 for head of household, and $40,000 for single or married filing separately. You will not qualify for any repayment protection if your income is at or exceeds $120,000 for married filing joint and qualifying widow(er), $100,000 for head of household, and $80,000 for single or married filing separate.
If your income falls between these two thresholds, you will qualify for partial repayment protection. It should be noted that the thresholds for repayment protection are lower than the first AGI phase-out threshold for the enhanced Child Tax Credit for 2021, so many taxpayers who receive the advance payments may not qualify for protection if their income increased in 2021.
Repayment protection is only applicable for the regular Child Tax Credit amount of $2,000. It does not apply to the enhanced Child Tax Credit for 2021 (that additional $1,000/$1,600 amount), but the advance payments do include the additional amount. Therefore, it’s important that, if your circumstances change regarding your children, filing status, or income as explained above, you inform the IRS as soon as possible. You don’t want to have a large tax bill because of the loss or phase-out of the credit when you file your return. Taxpayers whose repayment amounts exceed their federal tax refund and owe a balance due can set up an installment plan with the IRS to repay the amount.
What if you don’t get your Letter 6419 and don’t know how much advanced credit you received? If you have your taxes prepared by someone else, your preparer will need to know this amount, so it’s important to give them the Letter 6419 when you send them your tax documents. If you don’t have the letter, you will need to either provide bank statements to your preparer or a copy of your IRS account transcript for 2021 showing the amount of the payments. So, don’t lose that letter!