How the Advance Child Tax Credit May Reduce Your Refund or Increase Your Amount Due
By Ashley G. White, JD, CPA
For those of you who make up part of the millions of families who received up to half of their child tax credit via monthly payments during 2021, you may end up with a smaller refund than normal or an increased tax bill. Some taxpayers may be surprised by this result, as the stimulus payments did not create a similar result on their 2020 tax returns. More specifically, the reconciliation of stimulus payments on your 2020 tax return could only have a positive result for the taxpayer. If you did not receive your full amount of stimulus money, you could receive the remainder by way of a credit on your return. However, if you received more than you were entitled to, you were not required to repay the funds. That is not the case with the advance child tax credit.
As part of the American Rescue Plan, the standard child tax credit of up to $2,000 per child was expanded to a maximum of $3,600 per year for each child under the age of six and $3,000 per year for each child ages six through seventeen, subject to income limitations discussed in more detail below. The $2,000 credit was previously only available to be claimed on a tax return in one lump sum. However, in 2021, many parents received half of the credit (up to $300 per month for children under age six and $250 per month for children between ages six and seventeen) via monthly payments made from July through December.
To help taxpayers that received advance payments reconcile and receive all of the Child Tax Credits to which they are entitled, the IRS sent Letter 6419, 2021 Advance Child Tax Credit, starting late December 2021 and continuing into January. The letter provides the number and total amount of advanced Child Tax Credit payments the taxpayer received in 2021, and the number of qualifying children used to calculate the advance payments. This letter will be vital in computing the credit on your 2021 tax return. Eligible families who did not receive any advance Child Tax Credit payments can claim the full amount of the Child Tax Credit on their 2021 federal tax return, filed in 2022.
For purposes of illustration, if you are eligible to receive the maximum of $3,000 per child, have four children between the ages of six and seventeen, and received half of the eligible credit in advance, you will have a $6,000 credit on your tax return. By comparison, in prior years, you would have received $8,000 as a credit on your tax return. Obviously, in total, you are receiving more than usual, but your refund coming from your tax return is lower than in the past. Depending on the number and ages of eligible children and potential changes in income from the prior year, as discussed below, the difference could be more or less dramatic.
To further complicate things, the child tax credit was distributed to families based on 2020 or 2019 tax returns. If your income increased during 2021, you will be expected to pay the money back if you were overpaid because your income exceeds the threshold for the increased child tax credit or even the base child tax credit. The expanded credit is fully available for single filers earning up to $75,000 and for joint filers earning up to $150,000 but then begins to be phased out. For many families, the credit dropped to a maximum of $2,000 per child and started to phase out completely for single filers earning more than $200,000 or joint filers earning more than $400,000.
To illustrate the potential effects of an income change, assume joint filers with three kids under the age of six earned $100,000 in 2020. They did not opt out of the advance child tax payments and received $5,400 in advance payments. In 2021, their income increased to $200,000, causing them to be eligible for only the standard $2,000 per child. As such, they will only see a $600 credit on their 2021 tax return instead of the $6,000 credit that was on their 2020 return, most likely either reducing their refund or creating an increased amount due.
Another potential complication arises for divorced parents who share custody of a child and alternate the year of claiming the child tax credit for that child. As stated above, since the credit was most often based on the parent’s 2020 tax return, the advance payments may have gone to the wrong parent for purposes of 2021, which would result in the parent receiving the funds having to repay the advance payments and the other parent receiving the full credit on their return.
The American Rescue Plan does provide some amount of protection from repayment. Full repayment protection is provided for single filers earning less than $40,000 and joint filers earning less than $60,000, with that protection phased out as income rises to $80,000 and $120,000 respectively. The IRS website has some very thorough, updated information available regarding all aspects of the child tax credit at the following link: https://www.irs.gov/credits-deductions/2021-child-tax-credit-and-advance-child-tax-credit-payments-frequently-asked-questions. As always, you can also contact your BMSS trusted advisor for an inquiry regarding your unique circumstances by calling (833) CPA-BMSS or visiting our website for contact information.