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With the 2020 tax season behind us, many have breathed a sigh of relief, hoping to not think about taxes until next year. However, several changes to the Child Tax Credit for the 2021 tax year will impact some families as early as this this summer. If your income will be different in 2021 than it was for the 2020 tax year, you may need to take action now to avoid an overpayment. Some of the changes include:
• Disbursing advance payments for qualifying families (beginning July 15)
• Expanding the upper age limit of a qualifying child
• Making the credit 100% refundable
• Increasing the maximum value of credit available for qualifying taxpayers
Please note that these changes, which were a part of the American Rescue Plan Act, currently only affect the 2021 tax year Child Tax Credit. With that said, we will break down some of the details below.
Perhaps one of the biggest changes is the roll out of an advance payment of the Child Tax Credit. The advance payments will be 50% of the total child tax credit the family is estimated to be eligible to receive. The credit will be disbursed in six equal monthly payments starting July 15. The actual amount of Child Tax Credit will be calculated on the 2021 tax return, and be reduced by the advance payments received during the second half of 2021. Any excess credit will be applied to the 2021 tax return as a refundable credit. You will likely need to provide the amount of these advance payments when filing your 2021 tax return.
As an example, if your family’s estimated Child Tax Credit for 2021 was $3,000, you would receive 6 equal payments of $250 from July to December of 2021. When filing your 2021 tax return, if your family qualified for the full amount of $3,000 credit estimated, the amount of credit applied to your 2021 tax return would be $1,500 ($3,000 less the $1,500 advance payment). However, if your 2021 return calculated the Child Tax Credit at $2,500, the amount from of credit applied to your 2021 tax return would be $1,000. This reconciliation appears similar to the one for the Economic Impact Payment (EIP).
However, unlike the EIP, an overpayment of the Child Tax Credit may reduce your refund or increase the amount of tax owed. Additionally, these payments are planned to begin automatically — there is no “opt in” required. Since the amount of advance payment will be estimated based on 2020 tax return information (2019 if 2020 had not yet been processed), changes in family size or income levels during 2021 could have an unexpected impact when filing their 2021 tax return. The IRS has announced plans to have an online portal that will allow taxpayers to update their information, or opt out of advance payments.
The upper age limit of qualifying children for the child tax credit has been expanded to include those under the age of 18 at the end of 2021. The credit is also fully refundable for 2021, meaning if your tax liability has been reduced to zero, you may still get a refund of the credit. Additionally, the maximum amount of the credit has been increased to $3,600 for a Qualifying Child under 6, and $3,000 for a Qualifying Child age 6 to 17, subject to income phase out limits. The Child Tax Credit will begin reducing by $50 for each $1,000 by which your Modified Adjusted Gross Income (MAGI) exceeds the following income applicable threshold:
• $150, 000 if your filing status is Married Filing Joint, or Qualifying Widow/Widower
• $112,500 if your filing status is Head of Household
• $75,000 if your filing status is Single, or Married Filing Separate
Similar to the economic stimulus payments, the IRS will use information from your prior year tax return to process advance payments. The IRS also has a portal for those who wish to opt out of receiving advance payments. Opt out requests must be submitted at least three days before the advance payment date. Additional features will be added to the portal in the next few weeks to update banking/personal information, or submit information required to process the credit if you did not have a filing requirement.
For more information visit the IRS website: https://www.irs.gov/credits-deductions/2021-child-tax-credit-and-advance-child-tax-credit-payments-frequently-asked-questions or contact the Ramstein Tax Center at DSN: 480-1040 or Commercial: 06371-47-1040.
