Advance child tax credits

Editor: Valrie Chambers, CPA, Ph.D.

With the enactment of the American Rescue Plan Act (ARPA), P.L. 117-2, in March 2021, important changes were introduced to the child tax credit (CTC). These included that the amount increased for certain taxpayers, the definition of qualifying children expanded, the credit became fully refundable, and an advance CTC payment program was introduced.

It is important to note that these changes are temporary and apply to only the 2021 tax year. They also may present preparers with important cash flow and financial planning opportunities if acted on timely, which can also help clients avoid surprises during the 2021 tax return preparation season. The monthly advance CTC is the most novel modification; the credit is normally part of a taxpayer’s income tax return.

Under Sec. 24(i)(2), the definition of a qualifying child is expanded to include a child who has not attained the age of 18 as of the end of the 2021 calendar year. Sec. 24(i)(1) makes the CTC fully refundable for taxpayers with a principal place of abode in the United States for more than half of the 2021 tax year (or who are bona fide residents of Puerto Rico). Taxpayers may be eligible for the refundable credit even without having earned income.

The CTC amount is up to $3,000 for each qualifying child between the ages of 6 and 17 as of the end of 2021 and $3,600 for each child under the age of 6 at the end of the calendar year.

The CTC phases out in two ways based on the taxpayer’s modified adjusted gross income (MAGI) in 2021. Taxpayers can receive the full credit if their MAGI does not exceed $150,000 for married-filing-jointly (MFJ) or surviving spouse filers, $112,500 for head-of-household (HOH) filers, or $75,000 in any other case. At higher income levels, the first phaseout reduces the credit by $50 for each $1,000 (or remaining part thereof) of MAGI. However, taxpayers filing jointly with no more than $400,000 in MAGI, or $200,000 in any other case, can receive the same CTC amount as under prior law, $2,000 per qualifying child. The second phaseout reduces the remaining CTC by $50 for each $1,000 (or remaining part thereof) by which taxpayers’ MAGI is above these higher income limits.

ARPA also introduced Sec. 7527A to provide the advance payments program, which allows eligible taxpayers to receive 50% of the estimated CTC amount for which they are eligible on the 2021 tax return by periodic advance payments. Taxpayers generally do not need to take any action to receive the advance payments.

The total advance CTC payment amount is one-half of the 2021 estimated CTC. That amount is then divided into monthly advance installments. The estimate is based on information available to the IRS from the taxpayer’s 2020 return or, if that is not yet filed or available, the 2019 return, and any updates provided to the IRS through the Child Tax Credit Update Portal.

If the amount received in advance payments exceeds the total that should have been received, the taxpayer may be required to repay the IRS some or all the excess. If the taxpayer did not receive all that he or she is entitled to when filing a 2021 tax return, the remaining amount will be included as a credit on the tax return. To help reconcile the amount of advance payments received with what taxpayers are eligible for on their 2021 return, the IRS will send each taxpayer who received 2021 advance CTC payments a Letter 6419 in January 2022 with the total amount issued.

There is repayment protection for some filers who received more CTC than they were eligible for through the advance payments. If they don’t qualify for this protection, they would pay the excess back with their 2021 tax return as additional income tax. No repayment protection will be available for taxpayers with MAGI on their 2021 tax return over $120,000 for MFJ filers, $80,000 for single filers, or $100,000 for those filing as HOH. However, they will qualify for full repayment protection if their MAGI for the 2021 tax year is less than $60,000 for MFJ filers, $40,000 for single filers, or $50,000 for HOH filers. For filers falling in between the repayment protection thresholds, the repayment amount will be reduced.

Just as with a normally filed tax return, the advance CTC is not taxable income. The advance CTC payments could be garnished by nonfederal creditors; however, the advance CTC payments are also not counted as income when determining benefits assistance under any federal, state, or local program funded in whole or in part with federal funding. The advance CTC payments will not be offset for any overdue taxes, child support, or federal or state debts. If a refund is due on the 2021 tax return, any remaining CTC amounts included in the refund may be subject to offset for tax debts or other federal or state debts.

Advance payments are made to eligible taxpayers electronically based on the bank information previously provided on filed tax returns. If no bank information is available, payments are mailed according to the same monthly distribution dates.

In addition, the Child Tax Credit Update Portal allows taxpayers to opt out of receiving advance CTC payments or to provide or update their bank account information. Sometime in 2021, the portal also will allow taxpayers to make any necessary changes such as for the birth of a child, changes to the number of qualifying children, a filing status change for 2021, or a change in income levels that might affect the CTC eligible amount. The portal is also available to check the status of payments. Payments to eligible taxpayers who have not opted out began July 15 and are being made monthly through Dec. 15, 2021.

Taxpayers may opt out of advance CTC payments at any time before the end of the year, with specific unenrollment deadlines for each payment. To stop the payment that will otherwise be issued on the 15th of each month (and all subsequent advance payments), taxpayers must unenroll by 11:59 p.m. ET on the Monday before the first Thursday of that month. Currently, reenrollment in advance payments after opting out is not available, but the IRS states it will be available starting in late September. It is also important to note that the unenrollment is per individual, meaning that, for MFJ taxpayers, both spouses would need to unenroll. If only one of the individuals unenrolls, one-half of the joint payment would be made.

As mentioned above, it is important to note that these changes related to the CTC and the advances are temporary and only apply to the 2021 tax year. The Child Tax Credit Update Portal is available at www.irs.gov.