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Child Tax Credit Basics – What Your Clients Need to Know

In accordance with the American Rescue Plan Act passed in March 2021, the IRS began issuing the advance payments of the child tax credit to qualifying families. Here’s a brief overview of what your clients need to know about the child tax credit in 2021.

What is the child tax credit?

The child tax credit provides tax relief for families with children ages 17 and under, reducing the amount of tax liability that eligible parents owe on their federal income tax returns. This year brings the largest relief to the most families since the tax credit was established in 1997.

How has the child tax credit changed?

The stimulus bill made a few key changes to the child tax credit, including:

  • Increasing the size of the credit
  • Making the credit fully refundable
  • Including 17-year-olds as qualifying children

In addition, the IRS will disburse half of the credit in advance as monthly payments rather than lumping the full credit amount into a refund at tax time.

Under previous law, eligibility for the child tax credit was much more limited than it is under the American Rescue Plan. Prior to 2021, it was only available to individuals who reported adjusted gross income of at least $2,500. This meant that some of the lowest income families received no benefit. The child tax credit under the American Rescue Plan reaches more families, including those who are not required to file tax returns at all.

How much is the 2021 child tax credit?

For 2021, the child tax credit was raised from $2,000 per qualifying child to $3,000 for children ages 6-17 and $3,600 per qualifying child under the age of 6. If qualifying families choose to receive the advance payment of the credit, they will receive up to $250 for children ages 6-17 and up to $300 for children under age 6 each month from July through December 2021. Your clients can then claim the remaining credit on their 2021 tax returns.

Who is eligible for the child tax credit?

Families with children who are U.S. citizens will be eligible for this credit if their income falls under certain thresholds.

The credit has two phase-out considerations. The amount of the credit that represents an increase from the 2020 credit (i.e. the extra $1,000 or $1,600) is subject to one phase-out method, while the remaining credit (i.e. $2,000) is subject to another. Both phase-outs are based on your client’s modified adjusted gross income (MAGI).

For the first $1,000 or $1,600 of the child tax credit, phase-out begins once MAGI reaches…For the remaining $2,000 of the child tax credit, phase-out begins once MAGI reaches…
Single$75,000$200,000
Joint$150,000$400,000
Head of Household$112,500$200,000

How do the advance payments work?

If your client was eligible for the child tax credit in 2019 or 2020 and the IRS has their information on file, they need not take any action to receive advance payments of the child tax credit.

If your client did not qualify for the credit in 2020 but anticipates they will be eligible in 2021, they can update their information in the Child Tax Credit Portal. The portal is scheduled to begin accepting changes to dependents, marital status, and income later this year.

If your client did qualify for the credit in 2020 but anticipates they will be phased out of some (or all) of the credit in 2021, they need to be careful. The opportunity to opt out of the advance payments has expired, so they may still receive payments. There are a few things you can do to help them manage this problem. You can encourage them to:

  1. Update their information in the portal once the option becomes available so they stop receiving future advance payments
  2. Place those prepayments in a savings account until April 15th
  3. Repay those prepayments to the IRS now

If your client received a prepayment of the credit that you know they’re ineligible for, you can encourage them to send those payments back to the IRS now rather than waiting until April 15th. The easiest way to do this is to have them make an estimated tax payment of the amount they received. The IRS’s EFTPS portal allows taxpayers to make estimated tax payments at any point during the year.

There is some protection from child tax credit overpayments for taxpayers earning no greater than $40,000 (or joint filers earning no greater than $60,000). Any overpayments of the child tax credit for taxpayers making less than these amounts will not need to repay overpayments they received.

When do the advance payments of the child tax credit start?

The IRS issued the first advance payment of the child tax credit on July 15, 2021 and the second on August 13, 2021. The remaining payments are scheduled for September 15, October 15, November 15, and December 15, 2021.

If a bank account is on file, payments will be automatically deposited into your clients’ accounts, otherwise your clients will receive a physical check in the mail.

What is the future of the child tax credit?

Will the advance payments and temporary boost to the credit amount be made permanent? The administration is working toward making the child tax credit permanent or at least extending it through 2025, but the proposal will need to make its way through Congress to be finalized.

Next Steps

The child tax credit advance payments are in full swing, so make sure your clients understand how it works. If they’re not already aware of it, introduce your clients to the Child Tax Credit Portal. Once it’s fully operational, they can use the portal to reduce overpayments, to prove eligibility for the expanded credit, or to update their marital status or bank account information.

When tax filing season comes around, ask your clients about their advance payments. The IRS will send Letter 6419 to each recipient that details the number and dollar amount of advance payments they received. You can use this information to reconcile their remaining credit on their tax return.

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