You may have recently received a letter from the IRS indicating that you will begin receiving advance payments of your CTC (“Child Tax Credit”) starting in July 2021 and continuing through December 2021. While you will find information explaining the changes to the CTC for 2021 in this correspondence, we ask that you please pay close
attention to the information below in regards to the “Advance payments of the 2021 CTC” as this could potentially have a negative impact on you when filing your 2021 tax return as far as a refund versus owing money on your tax return. We want to make our clients aware that these payments are “in advance” and are your CTC payments that you may be accustomed to receiving in whole as a refund when you file your tax return. Therefore, your refund could potentially be much lower, or even yet, you could be left owing money at the end of the year due to receiving this credit in advance payments during July – December 2021 instead of as a lump sum credit on your tax return, as it has been in the past.
CTC temporarily expanded for 2021
Under the American Rescue Plan Act of 2021 (“the Act”)—for tax years beginning in 2021—the CTC is expanded as to eligibility, and amount, as follows:
(1) The definition of a qualifying child is broadened for 2021 to include 17 year-olds (i.e., children who haven’t turned 18 by the end of 2021).
(2) The CTC is increased to $3,000 per child ($3,600 for children under age 6 as of the close of the year) for 2021. But, the increased credit amounts are subject to their own phase out rule. So, for 2021, the CTC is subject to two sets of phase-out rules. The increased CTC amount (the $1,000 or $1,600 amount) is phased out for taxpayers with modified AGI of over $75,000 for singles, $112,500 for heads-of-households, and $150,000 for joint filers and surviving spouses. And, after applying that phase-out rule to the increased amount, your remaining $2,000 of CTC is subject to the existing phase-out rules (i.e., the $2,000 of credit is phased out for taxpayers with modified AGI of over $200,000/$400,000 for joint filers).
If you aren’t eligible to claim an increased CTC in 2021, you can still claim the regular $2,000 CTC, subject to the existing phase-out rules.
(3) The CTC is fully refundable for most taxpayers for 2021. The CTC for 2021 is fully refundable for a taxpayer (either spouse for a joint return) with a principal place of abode in the U.S. for more than one-half of the tax year, or for a taxpayer who is a bona fide resident of Puerto Rico for the tax year. So, as to these taxpayers, neither the earned income/alternative formula, nor the $1,400 maximum limitation, applies.
Advance payments of the 2021 CTC
IRS must establish a program to make periodic (monthly) advance payments (generally by direct deposits) equal to 50% of eligible taxpayers’ 2021 CTCs—in July 2021 through December of 2021. To determine your advance CTC payments, IRS will look at your 2020 return, or, if it’s not yet filed, your 2019 return.
If you receive advance CTC payments that are in excess of the CTC actually allowable to you for 2021, you’ll have to repay the excess amounts (by increasing the tax liability on your 2021 returns). But, for certain low and moderate income taxpayers, the excess may be reduced by a safe harbor amount, limiting the amount by which they’ll have to increase tax liability, and allowing them to keep a portion of the excess amount.
The IRS has given taxpayers the option to opt out of the advance payments by visiting their website and completing a series of steps and questions on the portal. You may access this portal by visiting https://www.irs.gov/credits-deductions/child-tax-credit-update-portal and selecting “Unenroll from Advance Payments”.
If you have children under 18, or other dependents, and would like to determine if these changes benefit you in 2021 or if you have any questions regarding the above information, please give us a call.
