The Child Tax Credit has been around since 1997, when it was first provided for under the Taxpayer Relief Act. It’s been tweaked, refined and improved numerous times since then, but perhaps never so much as in 2021.
The American Rescue Plan Act increased the amount of the credit for the 2021 tax year, and it allows more child dependents to qualify. Taxpayers with dependent children can also claim a portion of their 2021 Child Tax Credit payments well in advance of filing their 2021 tax return in 2022. But there’s at least one disadvantage to this last provision that can have some unpleasant tax consequences for some taxpayers. Not everyone is eager to take advantage of this one-year-only advance-credit rule.
The Improved 2021 Child Tax Credit
The 2021 Child Tax Credit, of which the Advance Child Tax Credit represents half, was improved upon by the American Rescue Plan Act in 2021 in response to the financial fallout of the coronavirus pandemic. The credit increased from $2,000 per child to $3,000 per child over the age of six. It goes up from $2,000 to $3,600 for children ages five or younger. The age limit for child dependents normally caps out at age 16, but the ARPA has extended this through age 17.
The credit is also fully refundable in 2021. Only the first $1,400 was refundable in previous years.
Income limits apply, however. The full credit per child is only available to taxpayers who earn modified adjusted gross incomes of $75,000 or less if they’re single. This limit increases to $112,500 for those who qualify for the head of household filing status. The limit is $150,000 for married parents who file joint tax returns. The credit starts adjusting downward at incomes above these thresholds. You must subtract $50 from the extra 2021 credit amount for every $1,000 you earn over the limit for your filing status.
These terms are only in place for the 2021 tax year. The credit will revert back to its previous terms in 2022 unless legislation is passed to extend them.
Read More: How to Decrease a Modified Adjusted Gross Income
The Advance Child Tax Credit
The IRS indicates that it will automatically send all qualifying taxpayers half of their 2021 Child Tax Credit in monthly installments beginning on July 15, 2021. There are six advance payments, so you'll receive portions of your credit through December 2021 unless you take a step to avoid claiming the payments. It will base the amount of your tax credit and your advance payments on information that was contained in your 2020 tax return, which you would file in 2021. It will base calculations on your 2019 return if you haven’t yet submitted your 2020 return or if it hasn’t yet been processed.
The IRS will use the information you submitted to its non-filer tool in order to receive your 2020 Economic Impact Payments if you’re not required to file a tax return because your income falls below the must-file limits.
Read More: Do I Need to File Taxes If I Didn't Work?
The Advance Credit will work out to either $250 per month for children ages six through 17 or $300 per month for children age five or younger, per child dependent. This money doesn’t represent income to you, just as the regular Child Tax Credit doesn’t. You don’t have to pay taxes on it, and it won’t affect your eligibility for federal benefits, such as SNAP or WIC.
Reconciling the Payments on Your 2021 Return
The concern for some parents is that the Advance Child Tax Credit is based on family circumstances that were in place in the 2020 tax year – or even in 2019 in some cases. Again, it’s half of the credit you would be entitled to in 2021, so you would claim the other half when you file your 2021 tax return in 2022. And the IRS clearly states that the amount of this advance credit is an “estimate” because it doesn’t yet have your 2021 tax return upon which to calculate it. You’ll receive Letter 6419 from the IRS in January 2022, telling you the total of the advance credit you received in 2021.
This shouldn’t be a problem if you were happily married with two young children in 2020, and your income worked out to $145,000 that year, and if nothing has changed. But maybe now you and your spouse have gone your separate ways. You have custody, so you’re entitled to claim in that respect, but your ex didn’t work. You earned that entire $145,000 back in 2020. Now, in 2021, you’re filing as head of household, not a joint married return. That $145,000 is $32,500 more than the $112,500 income limit for heads of household.
Read More: Can You File Head of Household If You're Single?
You'd have to give back the portion of the tax credit that exceeds the previous years' tax credit amounts if you no longer qualify for the tax credit in 2021. The amount you were overpaid will be added to the tax you owe when you complete and file your 2021 return.
Possible Repayment Protection
The IRS acknowledges that the estimated Advance Child Tax Credit can present an undue hardship on some taxpayers if they find that they’re obligated to repay some or all of the credit when they file their 2021 tax return in 2022. It’s therefore implemented repayment protection provisions. Some parents might only have to pay a portion back, if anything at all.
Married taxpayers are eligible for protection if they report an income of less than $120,000 in 2021. This figure also applies to those who use the qualifying widow(er) filing status. It drops to $100,000 if you’re head of household, and to $80,000 if you’re single or if you’re married but file a separate tax return from your spouse. These figures will earn you partial protection – you won’t have to pay all of the Advance Tax Credit back. You’re eligible for full protection if your income is even less.
Otherwise, your excess tax credit will be subtracted from any refund you would otherwise have received, or you’ll owe the IRS an increased balance at tax time if you weren’t expecting a refund.
If You Don’t Want Advance Payments
You can waive the Advance Child Tax Credit and just claim whatever you’re entitled to claim when you file your 2021 tax return if you're not absolutely certain that you'll qualify for the same credit in 2021 as you did in 2020. Go to the Child Tax Credit Update Portal on the IRS website. You can unenroll there, or you can update your personal information to mitigate the damage if you’ve already begun receiving payments.
And you don’t have to actually spend the advance credits you receive if you failed to unenroll before payments began being remitted. You can plop that money safely into savings so it’s there for you if your circumstances change so you have to give some or all of that money back. This gives you the advantage of some savings if the difficulties associated with COVID don’t abate in the foreseeable future, and you can go ahead and spend it if your qualifying circumstances change over the remainder of 2021.
- IRS: Advance Child Tax Credit Payments in 2021
- IRS: 2021 Child Tax Credit and Advance Child Tax Credit Payments ¬– Topic A General Information
- The White House: The Child Tax Credit
- The White House: Child Tax Credit for Non-Filers
- IRS: 2021 Child Tax Credit and Advance Child Tax Credit Payments – Topic B Eligibility for Advance Child Tax Credit Payments and the 2021 Child Tax Credit
- IRS: 2021 Child Tax Credit and Advance Child Tax Credit Payments – Topic D Calculation of Advance Child Tax Credit Payments
- IRS: 2021 Child Tax Credit and Advance Child Tax Credit Payments – Topic H Reconciling Your Advance Child Tax Credit Payments on Your 2021 Tax Return
- Congressional Research Service: The Child Tax Credit – Legislative History
- IRS: Child Tax Credit Update Portal
- IRS: Families Receiving Monthly Child Tax Credit Payments Can Now Update Their Direct Deposit Information
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.