The American Recue Plan Act made changes to the Child Tax Credit for 2021 that will significantly affect many taxpayers when they file their 2021 tax returns. As a result of this legislation many taxpayers with minor children can anticipate receiving monthly payments representing 1/12 of the anticipated credit on the 2021 tax return starting in July 2021. Any advance credit received by the taxpayer will ultimately be reconciled on their 2021 tax return. Set forth below are answers to some of the common questions that tax professionals and taxpayers have about the 2021 Child Tax Credit.
What is the age requirement for the Child Tax Credit?
The maximum age requirement has been raised for 2021 to be a child under age 18. This will, for the first time, make a 17-year-old an eligible dependent for the Child Tax Credit, including any advance payments of the credit.
What are the dollar amounts of the Child Tax Credit in 2021?The credit has been increased to $3,600 for children under age 6 and $3,000 for children aged 6 to 17.
What are the eligibility requirements for claiming the 2021 Child Tax Credit?The child must be a U.S. citizen or resident with a valid social security number. The child must live in the taxpayer’s home for at least half of the year, and the taxpayer must claim the child as a dependent on their 2021 tax return. For the first time, residents of Puerto Rico and U.S. Territories are eligible for the credit.
What are the income thresholds for claiming the higher Child Tax Credit?
The income limitations for the higher Child Tax Credit of $3,600/$3000 are Married Filing Joint with incomes of $150,000, Head of Household with incomes of $112,500, and $75,000 for all other filing statuses. The credit will be reduced by $50 for each $1,000 of income over these limits. Taxpayers whose income exceeds these thresholds will still be eligible to receive the $2,000 Child Tax Credit if their income is not greater than $400,000 for Married Filing Jointly or $200,000 for all other filing statuses.
What is the minimum income for claiming the Child Tax Credit?
There is no minimum income or earned income requirement to claim the Child Tax Credit in 2021. In prior years, the Child Tax Credit was a nonrefundable credit applied against the tax liability of the taxpayer. The Additional Child Tax Credit was the portion of the credit that was refundable and it required a taxpayer to have a minimum of $2,500 in earned income. The refundable credit was 15% of the earned income over $2,500 up to a maximum of $1,400 per child. In 2021 the entire Child Tax Credit is refundable; there is no earned income requirement.
How will the advance payment amounts be determined?
The IRS will base the monthly payment amounts on the information from the most recent tax return, 2020 or 2019. Using the most recently filed return, the IRS will determine the ages and number of children that a taxpayer can claim in 2021. The IRS will also use direct deposit information that they have on file for approximately 80% of eligible taxpayers to send the advance payments. Taxpayers that do not have direct deposit information on file with the IRS will be sent paper checks or debit cards. Individuals that have not filed a return in 2020 or 2019 have the opportunity to claim this credit by accessing a non-filers portal at the IRS website that should be operational in June.
Will taxpayers receive any notices concerning the advance payments of Child Tax Credit?
Yes. Based on information contained in the most recent tax return, the IRS is sending taxpayers a notice prior to the commencement of payments informing the taxpayer of their potential eligibility for the advance payment, and the taxpayer will be informed of the amount that the IRS has determined they are eligible to receive. This notice should be sent to potentially eligible taxpayers in June. After the final monthly payments are sent, the IRS will send the taxpayer a notice summarizing all of the payments that they have received during 2021.
When will the advance payment be sent to eligible taxpayers each month?
Payments are to be sent on the closest business day to the 15th of the month starting in July and ending in December.
What if the taxpayer’s situation has changed since they filed their 2020 tax return with respect to the children they will claim on their 2021 tax return?
The IRS will create an online portal before the advance payments commence in July. Taxpayers are to use the portal to update any information regarding their eligible children and to add or delete children that will be claimed on their 2021 tax return. This portal will be separate from the portal that is used by non-filers.
How will the advance payment of CTC affect the 2021 tax return?
Advance payment received by a taxpayer will be reconciled on the 2021 return. Taxpayers that receive advance payments of the CTC but do not claim the child as a dependent in 2021 will have to repay the advance. The CTC is not being treated in the same manner as the 2020 economic recovery payments where taxpayers did not have to repay any excess amount. With respect to the advance payments
of the CTC, a taxpayer that received the CTC in 2020 but will not claim that child in 2021 should use the IRS portal to notify the IRS of the change in circumstance.
Can a taxpayer opt out of receiving the advance payments of the Child Tax Credit?Once the IRS establishes the online portal, any taxpayer will be able to opt out of receiving advance payments of the CTC.
If a taxpayer does not receive any advance payments of the Child Tax Credit, can the CTC be claimed on the 2021 tax return?
Yes. If the taxpayer opts out of the advance payments or otherwise does not receive any advance payment of the Child Tax Credit, they will still be able to claim the entire credit amount on their 2021 tax return as a refundable credit.
How will children born after the advance payments commence be treated?
Newborns can be added at the online portal and the monthly advance payment amount will start on the next payment date. Any portion of the credit for the newborn not received as an advance will be claimed on the 2021 return.
What happens in 2022 to the Child Tax Credit?
The Child Tax Credit reverts to the 2020 level in 2022 unless Congress chooses to extend some or all of the temporary changes for 2021. There will be no advance payments of the credit starting in January and the credit amount will be up to $2,000 for each child under age 17. The refundable Additional Child Tax Credit will be $1,400 per child and the refundable portion of the credit will again be limited by 15% of the taxpayer’s earned income more than $2,500.