On March 11, 2020, The COVID-19 pandemic was declared to be a pandemic by the World Health Organization and what followed was nearly eighteen months of business closures, lockdowns and other government restrictions designed to prevent the spread of infection. While these measures likely prevented deaths, the effects still had a severe impact on financial and economic activity with many families left devastated. On the first anniversary of the pandemic declaration, President Joe Biden signed into law the American Rescue Plan Act of 2021 that put a $1.9 trillion economic into force. As part of that package, eligible taxpayers will receive an increase in the Child Tax Credit for tax year 2021 and also receive advance payments of the credit from the IRS during the tax year (as opposed to waiting for your refund in 2022).
Generally, to be eligible for the regular Child Tax Credit, ALL of the following must be satisfied:
- Your child must be a “qualifying child” as defined in 26 U.S.C. §152(c) to claim the credit, which includes ALL OF THE FOLLOWING:
- The child was the taxpayer’s child or other descendant, or the child was the taxpayer’s sibling, stepsibling or a descendant of the sibling or stepsibling. 26 U.S.C. §152(c)(2).
- The child is under age 17 at the end of the tax year. 26 U.S.C. §24(c)(1).
- The child lived with the taxpayer for more than half of the year. 26 U.S.C. §152(c)(1)(B).
- The child has not provided more than half of his or her own support during the tax year. 26 U.S.C. §152(c)(1)(D).
- The child has not filed a joint return with a spouse. 26 U.S.C. §152(c)(1)(E).
- For tax years beginning after December 31, 2017 and before January 1, 2026, the Child Tax Credit is increased to $2,000.00 for each qualifying child. 26 U.S.C. §24(h)(2). A partial credit of $500.00 is allowed for each dependent of the taxpayer who is not a “qualifying child”. 26 U.S.C. §24(h)(4). The amount of the credit allowed is reduced by $50.00 for each $1,000.00 (or fraction thereof) that the taxpayer’s modified adjusted gross income exceeds the following threshold amounts:
- $400,000.00 for joint return filers (increased from $110,000.00 by the Tax Cuts and Jobs Act of 2017). 26 U.S.C. §24(h)(3).
- $200,000.00 for filing single, head of household or qualifying widow (increased from $75,000.00 by the Tax Cuts and Jobs Act of 2017). 26 U.S.C. §24(h)(3).
- $55,000.00 for married filing separately. 26 U.S.C. §24(b)(2)(C).
- The Additional Child Tax Credit (ACTC) is the refundable portion of the Child Tax Credit up to $1,400.00 per child (meaning that even if your tax liability is zero, the taxpayer may still be entitled to a refund from the federal government up to $1,400.00 per child). This amount is adjusted for inflation for tax years after 2018. This is no longer a separate credit from the CTC (e.g. the refundable credit is the $1,400.00 portion of the $2,000.00 credit, NOT in addition to it). 26 U.S.C. §24(h)(5).
The Child Tax Credit improvements for tax years beginning after December 21, 2020 and before January 1, 2022 are as follows:
- The credit amount is increased to $3,000.00 per qualifying child ($3,600.00 in the case of a qualifying child who has not attained age 6 as of the close of the calendar year in which the taxable year of the taxpayer begins).
- The amount of the credit allowed is reduced by $50.00 for each $1,000.00 (or fraction thereof) that the taxpayer’s modified adjusted gross income exceeds the following threshold amounts:
- $150,000.00 in the case of a joint return or surviving spouse (total phase out at $170,000.00)
- $112,500.00 in the case of head of household (total phase out at $132,500.00).
- $75,000.00 in any other case (total phase out at $95,000.00)
- The entirety of the applicable credit is REFUNDABLE.
- Any qualifying child under age 18 is eligible to be claimed for the Child Tax Credit for 2021.
In addition, advance Child Tax Credit payments will be paid monthly throughout the year. To qualify, the taxpayer – and the spouse if a joint return was filed – must have ALL of the following:
- Filed a tax return in 2019 or 2020 and claimed the Child Tax Credit or gave the IRS information in 2020 to receive the Economic Impact Payment.
- Had a main home in the United States for more than half the year (the 50 states and the District of Columbia) or file a joint return with a spouse who has a main home in the United States for more than half the year.
- Have a qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number.
- Made less than the threshold amounts necessary to receive the Child Tax Credit.
The amount of the Advance Child Tax Credit Payments will total half of the total credit that the taxpayer is eligible for in payments spread over six months. This means that a person entitled to a $3,000.00 credit will receive up to $250.00 per month and a person entitled to a $3,600.00 credit will receive up to $300.00 per month. The other half of the total credit will be paid to the taxpayers when they file and claim the balance on their 2021 federal tax returns.
Taxpayers will automatically be enrolled for advance payments if the IRS determines eligibility from its own records. If the taxpayer provided banking information to the IRS, then payments will be direct deposit (otherwise, they will be checks mailed to the last-known address). Advance payments will start on July 15, 2021 and will continue to be paid monthly until December 2021. To unenroll, taxpayers must create an account and log into the Child Tax Credit Portal on the irs.gov website to select the opt-out choice. Generally, the taxpayer must opt out by the end of the previous month to avoid payments in the following month and any other month going forward. The deadlines to unenroll from the advanced child tax credit payments are as follows:
- July 2021: Unenroll by June 28, 2021 to avoid payment on July 15, 2021.
- August 2021: Unenroll by August 2, 2021 to avoid payment on August 13, 2021.
- September 2021: Unenroll by August 30, 2021 to avoid payment on September 15, 2021.
- October 2021: Unenroll by October 4, 2021 to avoid payment on October 15, 2021.
- November 2021: Unenroll by November 1, 2021 to avoid payment on November 15, 2021.
- December 2021: Unenroll by November 29, 2021 to avoid payment on December 15, 2021.
Why would anyone want to opt out of the Advanced Child Tax Credit? For starters, the eligibility is determined by your income and qualifying child status in 2019 or 2020. If, during 2021, you make significantly more money than you did the year before or your qualifying children turn 18 years old, then it is possible you can lose eligibility to some or all of the improved credit. If you receive advanced payments during 2021 but it turns out you were overpaid when you reconcile your taxes owed on your return, then the overpayments will be considered additional tax to be paid back to the government. If you think your income will be beyond the threshold to receive the improved child tax credit or you will no longer have qualifying children after 2021, then you should strongly consider opting out. But remember, you may still be eligible for the original child tax credit to claim on your federal return even if your income is too high to claim the improved child tax credit (provided your income does not exceed $200,000.00 for individuals or $400,000.00 for married couples).
Consulting with a tax professional ahead of time can help you determine or estimate how much your Advance Child Tax Credit will be (if any) and whether it is a good idea to simply opt out even if otherwise eligible. If you do not take any action whatsoever, you can unintentionally have a higher tax bill when you file your return in spring 2022. It is better to be proactive then reactive, and it is better to receive a refund than owe the government.
If you have any questions about the child tax credit or any other aspect of federal taxation, then do not hesitate to contact the experienced attorneys at Kershaw, Vititoe & Jedinak PLC for assistance today.