To help families through the pandemic, President Biden passed the American Rescue Plan Act, which includes a provision to provide families with the advance child tax credit in the form of monthly payments. These payments started going out in July and will continue through December 2021. If your family has received these payments, here are some planning points to consider and ways these payments may impact your taxes.
While the child tax credit has always been available, President Biden expanded this credit in March with passage of the American Rescue Plan Act of 2021 to help families through the pandemic. If you’re part of the millions of families who started receiving monthly payments from the IRS in July but aren’t sure of how this impacts your taxes, here are some planning points to consider. We always recommend talking with your wealth advisor or tax advisor if you have tax questions. Our CPAs and tax advisors work hand in hand with your wealth advisor to handle tax changes like the advance child tax credit.
The child tax credit has been around since 1997 and you usually would address it during tax season. If you have children who are claimed as dependents, you may be eligible for the child credit. Credits can reduce the tax you owe while deductions reduce the amount of your income before taxes.
In order for your child to be eligible for the child tax credit, the IRS (per IRS publication 972) requires that your child:
Previously, the child tax credit was non-refundable, which meant that it could only reduce your tax bill to zero. However, for 2021 this credit is now refundable, meaning you will receive the money for any unused portion.
In prior years, you would claim the child tax credit when you file your taxes. With the American Rescue Plan, the IRS sends one half of the anticipated child tax credit as a monthly payment starting July 15, 2021 until the end of the year. These payments are sent via direct deposit into a bank account the IRS has on file or in the form of a check. The remaining half will be processed as a credit on your 2021 federal income tax return. The ACTC is a refundable credit and applies only for 2021. The IRS uses your most recent tax return to calculate how much you’ll receive as an advanced payment.
Yes, ACTC revised the child tax credit with significant and substantial changes.
|Tax Filing Status||Income Threshold|
|Single filers||MAGI under $75,000|
|Married filing jointly||MAGI under $150,000|
|Head of Household||MAGI under $112,500|
|Tax Filing Status||Income Threshold|
|Single filers/Head of household||MAGI under $200,000|
|Married filing jointly||MAGI under $400,000|
The child tax credit is reduced by $50 for every $1,000 your MAGI exceeds the income limits listed in the first table. If your income limit reduces your credit to zero, your child tax credit is reduced to $2,000 per qualifying child (instead of the $3,000 available for 2021). Then you need to apply the second table’s income limits to see if the credit is reduced even further.
Example 1: You and your spouse file taxes jointly and have three kids—a 2-year-old, 10-year-old, and a 17-year-old (ages as of 12/31/2021). Your 2020 adjusted gross income is $100,000 (line 11 on Form 1040) with no foreign income. Your standard child tax credit amount is $9,600 ($3,600 for the 2-year-old + $3,000 for the 10-year-old + $3,000 for the 17-year-old). As noted above, your 17-year-old would be eligible for the credit just for this year. Our first step is to look at the income limitation - since your MAGI meets the first income threshold, you and your spouse are eligible to receive the full child tax credit. So, for the remainder of this year, you and your spouse would receive half of the $9,600 credit divided by six months, which comes to $800/month. The remaining amount will be processed as a credit on your 2021 federal income tax return:
Example 2: You and your spouse file taxes jointly and have three kids—a 2-year-old, 10-year-old, and a 17-year-old (ages as of 12/31/2021). Your 2020 adjusted gross income (line 11 on Form 1040) is $449,300 with no foreign income.
Since your MAGI in this example exceeds the income tax limit identified in the above tables, we need to add an additional step to calculate your final tax credit.
Here are some questions your tax advisor would ask to calculate your ACTC.
You can also visit the IRS website and use the Eligibility Assistant to find out if you qualify.
For divorced parents who take turns claiming their children as dependents on their tax return, you might receive the monthly payment in a year where you don’t claim your children as dependents on your tax return. For these cases, go to the Child Tax Credit Update Portal and enroll/unenroll for the payment.
Yes, you can elect to not receive the monthly advance payments by visiting the Child Tax Credit Update Portal. If you choose not to receive monthly payments, you’ll receive any remaining child tax credit as a lump sum when you file your tax return. If you’re married filing jointly and want to stop receiving the monthly payments, both individuals must unenroll.
Some possible reasons may include a filing status change (such as getting divorced), change in income, or a change in the number of qualifying children. You can go to the Child Tax Credit Update Portal to make changes so that the IRS has a more accurate estimate of your tax situation.
Some possible reasons may be if you moved, or the IRS doesn’t have the correct address or the right banking information. Visit the Child Tax Credit Update Portal to review your information and make any necessary changes.
If you haven’t filed your 2020 tax return, the IRS will use your 2019 info to calculate payment amounts. If you have any changes to income or a change in the number of qualifying children, visit the Child Tax Credit Update Portal to make updates.
It’s important to note that the ACTC is not like the stimulus checks that were distributed during the pandemic. If the IRS overpays you (based on old information or other reasons), you may be liable to pay taxes on the ACTC you received. It’s important to consider how your tax liabilities may be impacted when you file your 2021 tax return next year.
If you aren’t sure whether you qualify or have questions regarding whether you should continue to receive the monthly ACTC payments, we encourage you to reach out to your advisor. This situation may not apply to you if your children are older and don’t qualify, but you may have friends, family, and neighbors who may qualify for ACTC. Tax planning is integral to maximizing and managing your wealth and works most effectively when integrated with your holistic financial plan. Our tax planning service can complement your wealth management strategy and help you to address ACTC and other tax issues that may come up. Reach out to your wealth advisor to see how we can help you.
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