Important Changes Made to the 2021 Child Tax Credit

The American Rescue Plan Act of 2021 (ARPA), passed in March 2021, made a few key changes to the 2021 Child Tax Credit (CTC). Some of these changes include:

• The credit is fully refundable
• 17-year-olds are eligible as qualifying children
• The maximum amount of the credit is increased from $2,000 to $3,000 per qualifying child ($3,600 for children younger than age 6)

Monthly Advance CTC Payments

The ARPA also authorized monthly advance CTC payments to taxpayers with qualifying children beginning July 15 and ending December 15, 2021. The advance payments will provide up to $300 per month for each qualifying child under 6 and up to $250 per month for each qualifying child ages 6 through 17. Total advance payments won’t exceed 50 percent of the 2021 CTC. Taxpayers can use the IRS Child Tax Credit Eligibility Assistant to determine if they qualify for advance payments.

Advance payments aren’t considered income and won’t be reduced for prior-year overdue taxes or other federal or state debts owed. It’s also important for taxpayers to understand the advance payment will reduce the amount of credit claimed on the 2021 tax return. In certain situations, this may cause an unexpected tax liability on taxpayers’ 2021 tax return.

Similar to the economic impact payments, the fastest way to receive the advance payments is to provide the IRS with direct deposit information, such as a bank account, prepaid debit card, or mobile app. Checks will be mailed to those who don’t provide this information. 

Taxpayers will have the opportunity to update their banking, income, number of qualifying children, and other personal information using the IRS Child Tax Credit Update Portal (CTC UP).

Qualifications to Receive Advance Payments

• The taxpayer has at least one qualifying child who doesn’t turn 18 before January 1, 2022.
• The taxpayer’s main home is located in the U.S. for more than half of 2021.
• The taxpayer’s 2021 modified adjusted gross income (MAGI) is below certain limits: 
  • First Phaseout Limitation: For married couples with MAGI exceeding $150,000 ($75,000 for single, $112,500 for heads of household), but not exceeding $400,000 ($200,000 for all other statuses), the CTC can be reduced to, but not below, $2,000 per qualifying child. The advance payment amount will be similarly limited.
  • Second Phaseout Limitation: For married couples with MAGI exceeding $400,000 ($200,000 for all other statuses), the $2,000 credit per qualifying child is further reduced and the advance payment amount will be similarly limited.

Required Action to Receive Advance Payments

• If a taxpayer has filed a 2019 or 2020 tax return and is eligible to receive the CTC, no further action is required.
• If a taxpayer has not filed a 2019 or 2020 tax return, is required to file, and is eligible to receive the CTC, they should file their tax return(s).
• If a taxpayer has not filed a 2019 or 2020 tax return, is not required to file, and is eligible to receive the CTC, they can use the IRS’ nonfiler sign-up tool to register for the advance payments along with the third economic impact payment and the 2020 Recovery Rebate Credit.

Potential for Repayment

The advance payments sent to each taxpayer will be based on the IRS’ estimate of the taxpayer’s 2021 CTC using the most recent tax return on record. If the total payments received by the taxpayer are more than the actual 2021 credit, the excess will be repaid by increasing the taxpayer’s 2021 tax liability.

Full repayment protection is available for married couples with MAGI below $60,000 ($40,000 for singles, $50,000 for heads of household). Limited repayment protection may be available for married couples with MAGI below $120,000 ($80,000 for singles, $100,000 for heads of household).

Opt Out of Payments

All eligible taxpayers who have registered or filed a 2019 or 2020 tax return will receive the advance payments beginning July 15 unless they choose to opt out using the IRS CTC UP. For married couples, each spouse will need to opt out separately.

Reasons to Opt Out

• If a taxpayer anticipates 2021 income to exceed the phaseout thresholds:
  • When an ineligible taxpayer receives advance payments, their tax liability will increase by the amount of the payments received. 
• If a taxpayer’s quarterly estimated tax payments or withholding amounts don’t account for the advance payments: 
  • A taxpayer may choose to opt out to avoid a tax liability and potential interest and penalties associated with underpayment.
• If a taxpayer would rather claim the full credit at the time of filing their 2021 tax return:
  • Reasons could include a change in marital status, inability to accurately estimate taxable income, or another personal reason.

Avoid Scams

The only way to receive the monthly advance CTC payments or economic impact payments is to file a tax return or register online using the nonfiler sign-up tool available on the IRS’ website. 

The IRS will send Letter 6417 providing details about the estimated amount of advance payments the taxpayer can expect to receive. In January 2022, the IRS will send Letter 6419 providing the total amount of advance CTC payments received to help taxpayers calculate the remaining amount to claim on their 2021 tax return. 

As a reminder, the IRS will never use email, phone calls, text messages, or social media to initiate contact with a taxpayer to request personal information. Information on how to report phishing and other scams to the IRS can be found here. 

To learn more about other key provisions included in the ARPA, watch this BKD webinar. For more information, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.