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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.

 

Q: What is the 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:

• Is your son, daughter, stepchild, eligible foster child, brother, sister, stepsibling, halfsibling, or descendent of any of these relatives.
• Is under age 17 as of the end of the calendar year—for 2021 only, children aged 17 will qualify for the credit.
• Did not provide over half of his or her own support in the calendar year.
• Lived with you for more than half of the year (there are some exceptions, such as college).
• Is claimed as a dependent on your tax return.
• Does not file a joint return for the year.
• Is a U.S. citizen, national or resident alien.

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.

 

Q: What is the Advanced Child Tax Credit (ACTC)?

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.

 

Q: Are there any changes to the child tax credit with ACTC?

Yes, ACTC revised the child tax credit with significant and substantial changes.

• The amount of the child tax credit increased to $3,600 per qualifying child under the age of 6 and you could receive up to $1,800 in advance (generally six payments of $300/month). For children ages 6-17, the child tax credit is $3,000 per qualifying child. You could receive up to $1,500 in advance ($250 per month for six months). These higher amounts are only for 2021 and expire at the end of the year. President Biden has proposed extending these higher credit limits and making these changes permanent.
• Just for this year, children aged 17 would qualify for the child tax credit.
• Income limits also differ from previous years. To qualify for the full child tax credit, you need to meet the following conditions in 2021 with your modified adjusted gross income (MAGI):

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

 

• Also in 2021, there are two income limitations. If your MAGI exceeds the amounts listed above, you may qualify for at least $2,000 of the child tax credit (which comes to $166 per child/month).

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.

Here are two examples to show how ACTC may apply.

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:

• $9,600 child tax credit / 2 = $4,800.
• $4,800 / 6 months = $800 per month.

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.

• Step 1: We start with the standard child tax credit, which in this case is $9,600 ($3,600 for the 2-year-old + $3,000 for the 10-year-old + $3,000 for the 17-year-old). Note that the 17-year-old is now eligible for the credit in 2021.
• Step 2: Since you and your spouse are over the income threshold, we must determine the excess over $150,000 due to the 2021 income limitations:
  • $449,300 MAGI— $150,000 limit for married couples filing jointly = $299,300 over the limit.
  • For the $299,300 over the limit, we reduce the child tax credit by $50 for every $1,000 your MAGI exceeds the income limit per the IRS guidelines, so $299,300 / $1,000 = 299.3 x $50 = $14,965.
• Step 3: We then look at the initial child tax credit amount against the excess to see if you and your spouse meet the second income limitation:
  • Initial credit ($9,600) – excess ($14,965) = first income limit, < $0.
  • As your income exceeds the first limitation, the child tax credit that you qualify for is reduced to $2,000 per qualifying child.

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.

• Step 4: Determine your child tax credit with the reduced qualifying amount and second income limitation:
  • We now start with $6,000 of available child tax credit ($2,000 for the 2-year-old + $2,000 for the 10-year-old + $2,000 for the 17-year-old).
  • We look at the income limitation and determine the excess over the $400,000 income threshold. $449,300 MAGI – $400,000 limit for married couples filing jointly = $49,300, rounded to $50,000
  • For the $50,000 over the limit, we reduce the child tax credit by $50 for every $1,000 your MAGI exceeds the income limit per the IRS guidelines ($50,000 / $1,000 = 50 x $50 = $2,500).
  • From the $6,000 total child tax credit available, we subtract the $2,500 reduction, which leaves us with $3,500 of available tax credit ($6,000 credit – $2,500 reduction = $3,500 tax credit for 2021).
  • Half of the $3,500 would be paid this year over a 6-month period, which comes to $291.66/month, and the remaining amount will be processed as a credit on your 2021 federal income tax return:
    • $3,500 child tax credit / 2 = $1,750.
    • $1,750 / 6 months = $291.66/month.

 

Q: I have qualifying children, but I didn’t receive a monthly payment. How do I check if I’m eligible?

Here are some questions your tax advisor would ask to calculate your ACTC.

• What is your filing status?
• What was your MAGI for 2020 or your most recently filed tax return?
• How many kids under age 6?
• How many kids ages 6-17?

You can also visit the IRS website and use the Eligibility Assistant to find out if you qualify.

 

Q: I’m divorced, and my ex-spouse and I take turns claiming our children as dependents on our tax return. How does the ACTC apply to my situation?

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.

 

Q: I don’t want to receive monthly payments of ACTC. Can I opt out?

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.

 

Q: I’m not eligible to receive the child tax credit. Why?

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.

Q: I have qualifying children but didn’t receive any payments. Why?

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.

 

Q: I haven’t filed my 2020 tax return yet. Will I still receive monthly payments?

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.

 

Planning Points for the 2021 ACTC

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.