This week, millions of taxpayers with dependent children received a letter from the IRS detailing the new and improved child tax credit for 2021. We have already received a number of inquiries asking what it means. Rather than repeating the contents of the letter in this email, we enclose a link to more information from the IRS website: Advance Child Tax Credit Payments in 2021 | Internal Revenue Service (irs.gov).
Prior to the IRS releasing more information and FAQs on their own website, we have attempted to anticipate and answer your pertinent questions; these are based on the provisional information released so far, but there may be future legislative or procedural changes that will affect your final outcome:
Is this new Child Tax Credit (CTC) in addition to the previous CTC?
No, the new increased credit of $3,000/$3,600 replaces the previous tax credit for 2021 only. The previous tax credit was $2,000 (split between $1,400 refundable and $600 non-refundable portions). The new increased (and improved) credit is fully refundable, which means that you can receive it even if you don't have any tax liability.
Will I still be eligible for the previous $2,000 CTC if my income is higher than a modified Adjusted Gross Income (AGI) of $75,000/$112,500/$150,000?
Yes, you should still qualify for the amounts that you are used to seeing.
How will the IRS know that I am eligible to receive the credit advance?
The IRS will make an eligibility assumption based on your fully processed 2020 tax return (or 2019 if your 2020 return is not filed/processed by the end of June).
Should I opt out of receiving these amounts in advance (from July to December)?
You may want to opt out in these situations:
If you know that your income is going to be higher than the maximum adjusted AGI (see Q2), you may have to repay the advance CTC when you file your 2021 tax return.
If you are likely to owe tax without the offset provided by this credit - you may want to claim it on your 2021 return to reduce your tax liability instead of claiming it in advance.
You are divorced, and you alternate claiming children for the purpose of claiming CTC.
What are the consequences of not opting out?
You will receive $250/$300 per month from July until December - half of the total CTC amount. This means that your 2021 tax refund will be reduced by the amount received in advance. You should keep track of all the payments received in advance, as you will be required to reconcile the advance credits on your 2021 tax return.
How can I opt out of the advance credit?
The IRS is working on releasing a portal by the end of June. According to information released by the IRS so far, you should be able to use the portal to update your details such as your new address, bank account, filing status, and add newly-born children. Please continue checking: Advance Child Tax Credit Payments in 2021 | Internal Revenue Service (irs.gov).
Will I have to repay the advance CTC credit if my situation changes and I am no longer eligible to receive the remaining CTC on my 2021 tax return?
Our current understanding is that the IRS will provide a safe harbor for those whose income is below $40,000 (single), $50,000 (head of household) and $60,000 (married filing jointly). This means that you should not have to repay the money received in advance.
Does my dependent child need to have a social security number to be eligible? Yes, your child needs to have a social security number (not ITIN) and reside in the United States for more than 6 months in 2021.
If you still have specific questions after reading all of the above information, please feel free to contact us. If you think that your situation warrants more advanced tax planning, we would be happy to schedule a paid consultation, although in most cases it would make sense to wait until the IRS releases more information.