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Advance Child Tax

Credit Payments

Table of Contents:

  • Introduction
  • What has changed for the Child Tax Credits in 2021?
  • Who is eligible for Advance Child Tax Credit Payments in 2021?
  • How do I calculate my Child Tax Credit amount for the Tax Year 2021?
  • How do I know if I’m eligible for Advance Child Tax Credit Payment?
  • Is the Advance Child Tax Credit Taxable?
  • Are the Advance Payments fully refundable?
  • Who gets Advance Child Tax Credit Payments and when do they start?
  • Can I opt-out of the monthly payments and claim the credit directly on my 2021 Tax Return?
  • What if I do not file Taxes? Can I claim Advance Child Tax Credit Payment?
  • How do I reconcile my advance Child Tax Credit payment and my Child Tax Credit on my 2021 Tax Return?
  • Do I have to pay the excess Advance Child Tax Credit Payments back to the IRS What exactly is Repayment protection?
  • Final Words

Introduction

Of late, there has been an onslaught of updates from the IRS, under the American Rescue Plan Act (ARPA), which expands advance child tax credit Payment to the Tax year 2021. The Pandemic has hit working families with kids really hard and the IRS wants to make things a little easy, at least for certain Taxpayers, if not for the Tax Preparers. Thanks to the Act, the credit for “Qualified Taxpayers” can go up all the way up to  $3,600 per child! That’s a huge jump from the $2,000, which was the maximum for the Tax Year 2020. Now, is the calculation simple? Nope. Will everyone with a child get $3,600? Nope. In a typical IRS fashion, there are terms and conditions which apply. Let’s dive in.

What has changed for the Child Tax Credits in 2021?

The ARPA Act has increased the amount of Child Tax Credits for qualified dependents from $2,000 to $3,000 and up to $3,600 for kids below the age of 6. Kids between the age of 6 and 17 can claim up to $3,000 credit. This Tax credit is per child and fully refundable, unlike the previous Tax years. The Child Tax Credit for 2021 is given in the form of advance payments..aka (Advance Child Tax Credits). 50% of these credit payments will be given out from July 15 onwards, till the end of the year. The remaining credit can be claimed when you file your 2021 Tax return in 2022. Please note that the Advance Child Tax credit payment amounts are not based on the Credit for Other Dependents, which is not refundable. 

Who is eligible for Advance Child Tax Credit Payments in 2021?

While the IRS has put income limitations on the credits, all the previous tests for claiming Child Tax credit still apply.

The qualified dependant child must be an individual who does not turn 18 before January 1, 2022, and 

  • US Citizen, Resident, National
  • Have Valid Social Security Number
  • Must be claimed as a dependent by you in 2021 Tax year.
  • Must have lived with you for at least for more than half of the year
  • The individual does not provide more than one-half of his or her own support during 2021.
  • The individual does not file a joint return with the individual’s spouse for the tax year 2021 or files it only to claim a refund of withheld income tax or estimated tax paid.

Apart from these tests, you — or your spouse, if married filing a joint return — must have your main home in one of the 50 states or the District of Columbia for more than half the year. Well, US Expats abroad will not be eligible for these Credit Payments. Bad Luck! Uncle Joe isn’t fond of you.

How do I calculate my child tax credit amount?

The IRS has certain strings attached to claiming credit payments in 2021. US Expats with no main US home miss out. The credit will phase out for singles with MAGI over $75,000, $112,500 for Head-of-Household Filer, and $150,000 for Joint Filers. The amount of the credit is reduced by $50 for each $1,000 (or fraction thereof) of modified AGI over the applicable threshold amount. Remember, this phaseout is limited to the $1,000 or $1,600 temporary increased credit for 2021 and not to the $2,000 credit. This one, however, will reduce once your modified AGI in 2021 exceeds $400,000 if married and filing a joint return or $200,000 for all other filing statuses.

How do I know if I'm Eligible for this Credit?

Use the IRS Advance Child Tax credit eligibility assistant  to figure out if you are eligible to claim credit here .

IS THE ADVANCE Child Tax Credit Taxable?

No. Advance Child Tax credit payments are not income and will not be reported as income on your 2021 tax return. Advance child tax credit payments are advance payments of your tax year 2021 child tax credit. 

NOTE: 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.

Is the advance Child Tax Credit Payment fully Refundable?

Who gets the advance credit payments and when do they start?

Previously, the Child Tax credit was only partially refundable upto $1,400. For the Tax year 2021, this has changed, full credit can be claimed as a refund, even if there is no Tax liability.

The IRS will pay half the total credit amount in advance monthly payments beginning July 15. The other half when you file your 2021 income tax return. The dates for the payments are given below along with the amounts.

Payments Dates

Maximum Payment {Age-(0-5)}

Maximum Payment {Age(6-17)}

July 15th, 2021

$300

$250

August 13, 2021

$300

$250

September 15, 2021

$300

$250

October 15, 2021

$300

$250

November 15, 2021

$300

$250

December 15, 2021

$300

$250

File your Tax return in 2022

$1,800

$1,500 

Child-tax -Credits-2021
Claim Advance Child Tax Credit up to $3,600 per Child

Can I opt out of the monthly payments and claim it next year on my Tax return?

Absolutely, the Child Tax Credit Update Portal (CTC UP) will allow you to unenroll from receiving advance Credit payments. You can Unenroll here. Unenrolling makes sense for a lot of people who are expecting a change in circumstances in the second half of the Tax year 2021. There are families with separated parents and in order for the right person to claim this credit, you should unenroll from this payment. If you are expecting a big paycheck (something rare in 2021) or know for the fact that your income is going to cross the threshold limit, you must unenroll(Both parents must unenroll). Finally, if you plan to move out of the US for more than half of the year( Expats), you should opt out.

What if I don't file taxes? Can I still claim The Advance Child Tax Credit ?

Yes, if you are a Non-Filer, or haven’t filed previously with the IRS, the IRS has created a Non-Filer’s Tool. This Tool allows non-tax filers to let the IRS know how many kids they have and their ages, so they can get the correct payment amount.

You will also have to provide personal information such as your name, current address, email, date of birth, and social security number (or other taxpayer identification number) for you and your dependents. If you want your payments by direct deposit, you’ll also have to give your bank account number, account type, routing number, and IP PIN. Please do not use the tool if you have filed your 2020 Tax return or did not have a main home in the United States for more than half of the year.

How do I reconcile my advance Child Tax Credit payment and my Child Tax Credit on my 2021 Tax Return?

As you know that only 50% of the payment will be made from July 2021 through December 2021. The rest will be claimed on your 2021 Tax return filed in 2022. There will be cases where 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. If the payments are more than the credit, you may have to pay it back to the IRS. 

Hence the IRS urges taxpayers to use the Child Tax Credit Update Portal (CTC UP) throughout 2021 to help ensure that the IRS has the most up-to-date information regarding your eligibility for the 2021 Child Tax Credit. With this updated estimate of your properly allowed child tax credit amount, the IRS can appropriately reduce your advance child tax credit payment amounts throughout 2021.

Do I have to pay back the excess Advance Child Tax Credit Payments back to the IRS?

As per the IRS, it depends! With any advance payments, there will be cases where the income may exceed the AGI threshold limits and taxpayers may receive more payments than they were supposed to. If you qualify for the repayment protection, you will be excused from repaying some or all of the excess amount. If you do not qualify for repayment protection, you will need to report the entire excess amount on your 2021 tax return as additional income tax. This additional income tax will reduce the amount of your tax refund or increase your total tax due for 2021.

What exactly is Repayment protection?

Repayment protection will pardon you from paying some or all of the amount back to the IRS. 

According to the IRS, you will qualify for full repayment protection and won’t need to repay any excess amount if your main home was in the United States for more than half of 2021 and your modified adjusted gross income (AGI) for 2021 is at or below the following amount based on the filing status on your 2021 tax return:

  • $60,000 if you are married and filing a joint return or if filing as a qualifying widow or widower;
  • $50,000 if you are filing as head of household; and
  • $40,000 if you are a single filer or are married and filing a separate return.

Your repayment protection may be limited if your modified AGI exceeds these amounts or your main home was not in the United States for more than half of 2021.

You will not qualify for repayment protection if your income exceeds 120,000 if you are married and filing a joint return or if filing as a qualifying widow or widower; $100,000 if you are filing as head of household; and $80,000 if you are a single filer or are married and filing a separate return.

Bottomline –  The majority of individuals who need to repay excess advance Child Tax Credit payments will satisfy that balance through a reduction in their expected federal income tax refund. If not, pay more in taxes.

Important Update – In January 2022, the IRS will send you Letter 6419 to provide the total amount of advance Child Tax Credit payments that were disbursed to you during 2021. Please keep this letter regarding your advance Child Tax Credit payments with your tax records. You may need to refer to this letter when you file your 2021 tax return during the 2022 tax filing season.

Final Words

While additional Child tax credits in the form of advance payments are great for families affected by the Covid-19, caution needs to be exerted, especially, if you are closer to the income threshold limits.  There will be additional challenges at the time of filing for Tax Preparers and millions of those who prepare their Tax Returns themselves. The Stimulus checks were complicated enough and now Child Tax Credits will join this party next tax year.