What to know about the latest child tax credit?

Dawn Rye | Writer

The American Rescue Plan Act enacted in March authorized the expanded Child Tax Credit. Part of this expansion is the 2021 tax credit to families by sending them direct payments rather than having them wait until they prepare their 2021 taxes in 2022. Eligibility is based on 2019 or 2020 tax return information, depending on when someone filed.

Woltman Group PC, CPA, Heather Hofer said people qualify for Child Tax Credit payments if they have a qualifying child. For 2021, a qualifying child is an individual who does not turn 18 before Jan. 1, 2022, and who satisfies the following conditions. Also, as long as your adjusted gross income, or AGI, is $75,000 or less, single taxpayer parents will qualify for the whole child tax credit amount. After $75,000, the amount begins phasing out. At $240,000, single filers phase-out of the tax credit entirely. If you are married and filing jointly with your spouse, your AGI needs to be $150,000 or less to qualify for the whole child tax credit amount. At $440,000, couples will phase-out of the tax credit entirely.

What is the child tax credit? The child tax credit allows taxpayers to claim up to $3,600 per child under age six and up to $3,000 per child ages six to 17 in 2021. There is no cap on the total credit amount that a filer with multiple children can claim. The credit is fully refundable. If the credit exceeds taxes owed, families can receive the excess amount as a tax refund.

What is some advice you can give parents about the tax return credit? She explained that these payments advance on the child tax credit, which means eligible people will get up to half of their child tax credit in these monthly payments and the other half when they file their 2021 taxes. Because these credits are paid in advance, every dollar received will reduce the amount of the Child Tax Credit claimed on your 2021 tax return. Hofer said 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 due tax to the IRS if you un-enroll and claim the entire credit when you file your 2021 tax return. The IRS recommends that you un-enroll if you expect the amount of tax you owe to be greater than your expected child tax refund when you file your return for 2021. Those who are married and filing jointly must separately un-enroll from the tax credit.

What does this credit mean to families filing taxes in March? She stated that no matter when a person files their 2021 return, they will need to reconcile the advance child tax credit payments with the child tax credit on their 2021 tax return by comparing the total amount of the advance to what someone can property claim on their 2021 tax return. 

She explained that when residents or couples file their 2021 tax return during 2022, they will need to compare the total amount of the advance Child Tax Credit payments they received during 2021; with the child tax credit amount, they can adequately claim your 2021 tax return. If the amount of the child tax credit exceeds the total amount of the advance child tax credit payment, residents can claim the remaining about of the child tax credit on their 2021 tax return. If they receive a total amount of advance child tax credit payments that exceed the amount of child tax credit they can adequately claim on their 2021 tax year, they may need to repay the IRS some or all of that excess payment.

What if someone had a baby in 2021?  Hofer explained that the Child Tax Credit Update Portal would be updated to access information from the IRS later this year about the qualifying children on their 2021 tax return. If someone did not receive advance child tax credit payments for a qualified child, they would be allowed to claim the total amount allowable child tax credit on their 2021 tax return. 

Hofer stated that in January 2022, the IRS would send out a letter to provide the total amount of advance child tax credit payments that were disbursed to you during 2021. She recommends keeping this letter regarding your advance child tax credit payments with your tax records.

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