Now that July is here, many of our S&K clients who are full-time parents or caregivers to school-aged children, have begun receiving their Advance Child Tax Credit payments from the IRS.
Most families will receive the first half of the credit in advance monthly payments from July to December this year – unless they opt out. Then, they will receive the full credit in a lump sum when they file their taxes in 2022. The monthly amount will be $250 for children ages 6 to 17 and $300 for children under 6 in families receiving the full credit.
While welcomed by many, these payments have also sparked many questions among our clients. Here are a few of the most popular questions we have received about this important stimulus program.
How do I qualify for repayment protection?
According to IRS.gov, you qualify for full repayment protection and won’t need to repay any excess amount if your main home was in the United States for more than half of 2021 and your modified adjusted gross income (AGI) for 2021 is at or below the following amount based on the filing status on your 2021 tax return:
- $60,000 if you are married and filing a joint return or if filing as a qualifying widow or widower;
- $50,000 if you are filing as head of household; and
- $40,000 if you are a single filer or are married and filing a separate return.
Your repayment protection may be limited if your modified AGI exceeds these amounts or your main home was not in the United States for more than half of 2021.
If I qualify for repayment protection, how much repayment relief will I qualify for?
IRS.gov says that if you qualify for repayment protection, the amount of your tax liability from excess advance Child Tax Credit payments is reduced by up to the full repayment protection amount. The full repayment protection amount equals $2,000, multiplied by the following:
- The number of qualifying children that the IRS considered in determining the IRS’s initial estimate of your advance Child Tax Credit payments, minus
- The number of qualifying children properly considered in determining the allowed Child Tax Credit amount on your 2021 tax return.
Example: You properly claimed three qualifying children on your 2020 tax return, but claim only one qualifying child on your 2021 tax return. You can receive up to $4,000 in repayment protection (that is, $2,000 for each excess qualifying child) if you qualify.
You will be able to apply the full repayment protection amount of $2,000 for each excess qualifying child if your modified adjusted gross income (AGI) is at or below the following amounts based on the filing status on your 2021 tax return:
- $60,000 if you are married and filing a joint return or if filing as a qualifying widow or widower;
- $50,000 if you are filing as head of household; and
- $40,000 if you are a single filer or you are married and filing a separate return.
How can I opt out of the program, and why would I want to?
You may want to unenroll from receiving advance Child Tax Credit payments for several reasons, including if you expect the amount of tax you owe to be greater than your expected refund when you file your 2021 tax return. The payments you receive are an advance of the Child Tax Credit that you would normally get when you file your 2021 tax return.
Because these credits are paid in advance, every dollar you receive will reduce the amount of Child Tax Credit you will claim on your 2021 tax return. This means that by accepting advance child tax credit payments, the amount of your refund may be reduced or the amount of tax you owe may increase.
You may avoid owing tax to the IRS if you unenroll and claim the entire credit when you file your 2021 tax return. To stop advance payments, you must unenroll three days before the first Thursday of next month by 11:59 p.m. EST. You do not need to unenroll each month, however you will receive the next scheduled advance payment until the IRS processes your request to unenroll, which could take up to seven days. The IRS recommends that you check back after unenrolling to make sure your request was processed successfully.
To unenroll, use the Child Tax Credit Update Portal, found here.
Why might I have to return part of my payments?
The full enhanced credit is available to all eligible children in families with adjusted gross income of less than $75,000 for single parents and $150,000 for a married couple filing jointly. It ends for individuals earning $95,000 and married couples filing jointly making $170,000, though they’d still be eligible for the regular child tax credit, meaning they’d get lower monthly payments starting in July.
- Your income went up in 2021 – The IRS is calculating eligibility for the advance payments using the adjusted gross income and number of dependents from 2020 or 2019 tax returns. For some families, that information is outdated and could change your eligibility for the child tax credit.
- Families may receive excess payments if their adjusted gross income went up in 2021. It could mean that you are eligible for less of the credit than you had received previously, and in some cases, you will owe the IRS.
- It could also mean that when you file your 2021 taxes, you will receive less of the second half of the credit, which is fully refundable and will either offset any taxes owed or be returned in a refund. If the remaining credit you are eligible for isn’t enough to offset what you owe, you would receive a bill from the IRS.
- You may also owe the IRS if you claimed more dependents in a previous year than are eligible for the credit in 2021.
- You split custody of your dependents – If you and the other parent switch who claims your dependents each year, problems could result. If one parent claimed the child in 2020 but won’t claim them in 2021, they may get advance payments that they’ll have to pay back when they file taxes next year. To avoid this – or any other issues – it might make sense for people in this situation to opt out of the payments altogether and have one parent claim the full credit as a lump sum.
- Your child turns 18 in 2021 – The enhanced child tax credit extended the benefit to children who are 17 in 2021, but those who turn 18 during the year may not be eligible. The IRS will use 2019 or 2020 returns to determine how much money is sent but will reconcile the credit based on the age of children on Jan. 1, 2022. That means that if you have a child who turns 18 this year, he or she may not be eligible for the child tax credit after all, though they may qualify for other benefits depending on their situation. If you have a 17-year old child on your 2020 tax return, but they are going to by 18 by the end of 2021, they will not qualify. This means you may be on the hook for any payments sent to your family.
There’s time to update your information
Most families will receive some benefit through the expanded child tax credit, and very few are likely to have circumstances that would mean they have to pay back any of the advance payments. Still, for those who are worried they may have overpaid and want to avoid a tax bill, there are a few options.
In June, the IRS released several tools for families to update their information with the agency. With the Child Tax Credit Update Portal, families can see if they’re enrolled for the advance payments and opt out. Doing this will ensure that they don’t have to pay any of the credit back to the IRS, as they’ll get what they’re owed when they file 2021 taxes. In the future, this portal will also allow families to update their bank account information. Families can also check their eligibility through the Child Tax Credit Eligibility Assistant.
If you have further questions about the Child Tax Credit that were not addressed here, visit the IRS website or contact your S&K partner directly, and he or she would be happy to talk with you and provide the answers you need.