The IRS has begun distributions of the advanced child tax credit for 2021. The American Rescue Plan Act (ARPA) of 2021 expanded the child tax credit. This included both an increase in the amount of the credit and an automatic advanced payment of half of the credit amount.
Payments began automatically this week for taxpayers the IRS has determined to be eligible. The IRS has used the taxpayer’s 2020 or 2019 federal tax return, if filed, or information from the non-filing tool if otherwise available.
The simple version is that for this year only, 2021, the child tax credit amounts have increased and the IRS will be sending advanced payments of half a taxpayer’s anticipated credit.
The half of the credit that will be refunded will be done in six equal monthly payments from July through December. Taxpayers who receive advanced payments it turns out they are not entitled to may — but may not — need to pay back the government.
Here’s the lowdown on what has changed and how it is supposed to work.
Increase in the Child Tax Credit Amount for 2021
The amount of the credit has increased from $2,000 per qualifying child to $3,600 per qualifying child age 5 or under at the end of 2021 and $3,000 per qualifying child age 6 through 17 at the end of 2021. This increase, and the advanced payments, are only for 2021. For 2022, the numbers default back to the previous amounts.
The IRS sent notices in June to taxpayers it determined to be eligible for advanced payments. These notices detailed the amount and timing of the advanced payments. No additional action is required from the taxpayer unless they want to change their bank information or do not want to get the advanced payments.
How to Check Your Status
The IRS has a portal where you can make changes to your bank information. You can also stop the payments if you wish to do so. Any stop would be effective the following month.
You can also access the non-filing tool form here, if you think you are eligible but have not filed a return for either of the last two tax years or provided non-filing information to the IRS before.
You can check your eligibility for advanced payments here.
Income Limits on Increased Credit
The increase in the credit from the 2020 base of $2,000 per qualifying child is phased out above certain annual income thresholds.
The phaseout begins at a modified adjusted gross income of $75,000 for taxpayers filing as single or married filing separately; $112,500 for taxpayers filing as head of household; and $150,000 for taxpayers filing as married filing jointly. In all cases, the credit is reduced by $50 for each $1,000 of income above the threshold.
For example, if your income exceeds the threshold by $2,500, your credits would be reduced by $150 (two $1,000s plus part of $1,000 over the threshold). This phaseout reduces the additional amount for each child: the $1,600 increase for children age 5 or under and the $1,000 increase for children age 6 through 17.
For most taxpayers, their modified adjusted gross income is the same as their gross income.
The only add-ins back to income to modify your adjusted gross for this credit are foreign earned income from form 2555 or income excluded from gross received from sources in Puerto Rico or American Samoa. Absent those add-ins your modified adjusted gross income is simply your gross income for determining eligibility for this credit.
These limits apply only to the increased portion of the credit; there are other income limits applicable to the base credit.
Income Limits for the Base Child Tax Credit for 2021
The base child tax credit is not reduced below $2,000 per child unless your modified adjusted gross income exceeds $400,000 for taxpayers filing as married filing jointly, or exceeds $200,000 for the other filing statuses (single, head of household, and married filing as single).
The reduction is the same: The credit is reduced $50 per child for each $1,000 or part of $1,000 over the applicable threshold.
What If You Have No Income?
The child tax credit is a refundable credit; you do not need to have income to get the credit. If you have qualifying children and have not filed a tax return in the last two years, you should use the non-filing tool to provide the IRS with your information. Of course, if you should have filed a return but haven’t yet, you should do that.
Reconciling the Credit on Your 2021 Return
The IRS will send information notices in January to taxpayers who received advanced child tax credit payments. These notices will provide the information necessary to reconcile the payments received with the actual credits on your 2021 return.
If you obtain advanced credits you are not entitled to, you may have to repay the IRS. Note that is a “may have to” not a “will have to.” There are specific exceptions.
The IRS allows for repayment protection based upon income and filing status. If your modified adjusted gross income for 2021 is below $60,000 for married filing jointly, $50,000 for head of household, or $40,000 for single filers, the IRS provides repayment protection.
Basically this means that as long as you were otherwise eligible for the credit (i.e., you maintained a household in the United States for at least half the year, and any other qualifying criteria), it will forgive any excess payments you received, up to $2,000 per child. This is called “full repayment protection.”
For taxpayers with modified adjusted gross incomes at or over an upper limit, there is no repayment protection.
These income limits are double the full repayment protection limits: $120,000 for filers with a status of married filing jointly, $100,000 for head of household, and $80,000 for filers filing as single.
In between the levels for full repayment protection and no repayment protection, there is a phaseout.
For example, a taxpayer filing as married filing jointly with a modified adjusted gross income of $75,000 would have their repayment protection reduced by 25 percent, as they have passed 25 percent of the way from the $60,000 full repayment limit to the $120,000 no repayment limit.
The Bottom Line on the 2021 Child Tax Credit
Many taxpayers found the existing child tax credit to be confusing. This does not make it easier to understand, but it does put a lot of money back into a parent’s pockets. There’s a lot to it. The IRS has a detailed set of questions and answers broken down by category that you can access here.
Automatic advanced payments will potentially cause problems for some taxpayers. For example, it is common for divorced parents to alternate years they get to take the credit and this could be a whole new can of worms. Remember that you can update your information or stop payments directly from the link above.
In addition to the trove of resources on the IRS website, taxpayers can also seek professional guidance. Tax professionals are generally going to be well versed on this and can guide you on if and how to make changes. These tax laws are complex and many people need help and should seek help when appropriate.