Hello this is Debra Marie the Tax Queen coming back with another wonderful post where I will be sharing some helpful information on the Advance Child Tax Credit Payments. So, let’s begin!
There was an important tax change for families this summer—and you’ve probably already got the surprise. But is it really a surprise when you knew about it when the American Rescue Plan was passed earlier this year telling taxpayers who were eligible would be getting an advance child tax credit payment in July?
The credit isn’t new. And you would ask, what do you mean it’s not new, because we have never received the payment in prior years. Well do you remember at the end of each year when you filed your taxes, you’d get the child tax credit in a lump sum. For the 2020 tax year the child tax credit was $2,000 per qualifying dependent child under age 17. 6 If the amount of the credit exceeds the tax owed, then the taxpayer generally was entitled to a refund of the excess credit amount up to $1,400 per child. Remember? Of course, you do. Most of you were getting EIC (Earned Income Credit) along with this Child Tax Credit.
Not only is it more money, but families will receive the credit each month in the form of advance payments.
There have been many questions asked about this significant change. So here is what you need to know.
How much is the credit?
For 2021, the maximum child tax credit is $3,600 per child for those five and under and $3,000 per child ages 6 to 17. That works out to $300 per month for children who are five and younger and $250 for those between the ages of 6 and 17.
So, if my 2021 credit is $3,600, how much will I get as an advance payment?
$300 per month. Here’s the math: Half of the credit will be distributed in six monthly installments through December 2021. The remainder will be calculated and paid out at tax time in 2022.
How will the IRS know how much to send me?
The IRS will estimate the credit based on your 2020 tax return. If you have not yet filed, or if your 2020 tax return has not been processed, the IRS will use the info on your 2019 tax return.
Are there any income limits?
The credit has two phaseouts. Phaseouts mean that your payment will go down as your income goes up.
The number that matters to most taxpayers is adjusted gross income, or AGI, found on line 11 on your 2020 Form 1040 or line 8b on your 2019 Form 1040).
Taxpayers who file Form 2555 or have income from Puerto Rico or American Samoa you may need to adjust.
The first part of the phaseout has to do with income. Now just to let you know I have broken this information down so if you are having trouble understanding or want more information on any of these subjects, I suggest you go talk to a tax professional and we will be able to discuss it more in depth.
Now back to phaseout #1 – if your income exceeds $75,000 for individual taxpayers, $150,000 for married taxpayers filing jointly, and $112,500 for taxpayers filing as head of household, the credit will be reduced in increments to $2,000 per child. If that amount sounds familiar, you are right: That was the amount of the credit before any changes were made in 2021.
Phaseout #2 – reduces the credit below $2,000 per child if your income exceeds $400,000 for married taxpayers filing jointly and $200,000 for everyone else. Even if you have no income, you can receive payments if you otherwise qualify. To qualify you must have a qualifying child and you—and your spouse, if married filing jointly—have a Social Security number (SSN) or an Individual Taxpayer Identification Number (ITIN).
Who is a qualifying child?
The rules are pretty much the same as before, except that the age is 17 or younger—it is no longer 16. The child must still be your dependent with a valid SSN and be your son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendant of any of them—like a grandchild or nephew. The “old” child tax credit support and residency rules still apply. You are probably wondering about the other dependents like the boyfriend, the dad, the mom, the cousin…you get the point. This is not the same as the $500 Credit for Other Dependents.
How will I get paid?
Most families will receive payments via direct deposit. The IRS will use the bank account information on your most recently filed 2019 or 2020 tax return, the Non-Filer Tool, or from a federal agency like the Social Security Administration that provides your benefits. If the IRS does not have your banking info, they will mail a check. Now If you don’t want the advance payments you can unenroll through the IRS portal. If you file as married, both spouses need to unenroll—if just one of you does, you will receive half of the payments.
When—and what time—will I get my payment?
The first child tax payments will go out on July 15 via direct deposit each month through December of 2021. If your banking information, address, or if you have any other change, you can update it using the IRS portal.
Are these payments taxable and will payments be offset if I owe taxes or child support?
So why wouldn’t you want the advance payments?
Well you might not want the payment because you would rather claim the full credit on your 2021 return, or you know you will not be eligible for the full credit on your 2021 return.
Will there be a repayment obligation?
Well sort of. The payments that you receive are based on an estimate of the amount of child tax credit you would be entitled to claim on your 2021 tax return. When you file your 2021 return, you may have to pay back the extra if you received too much. But most families will get the right amount. If you do not, then there is this thing called repayment protection which is a safe harbor and are subject to phaseouts.
The full repayment protection amount is $2,000 for each “extra” child that you add to your 2021 tax return or if the IRS used an estimate for your advance payments, they would multiply the difference of $2,000 between the number of qualifying children that will be claimed on your 2021 tax return. You can use that amount to offset any overpayment.
You are probably thinking to yourself “I have no clue what she just said?” Ok let’s say you claimed two qualifying children on your 2020 tax return, but now you just have one on your 2021 tax return. Your full repayment protection will be $2,000 ($2,000 x one extra qualifying child). So, if you were overpaid by $2,000, you would offset it with your $2,000 repayment protection amount and not owe anything. Now with the phaseouts that we discussed earlier well that math is not complicated. If your 2021 AGI is less than $40,000 for individual taxpayers, $60,000 for married taxpayers filing jointly, or $50,000 for taxpayers filing as head of household, then you will qualify for the full repayment protection amount.
As your income goes up, the value of your repayment protection amount will go down. You will not qualify for any repayment protection when your AGI reaches $80,000 for individual taxpayers, $120,000 for married taxpayers filing jointly, and $100,000 for taxpayers filing as head of household.
But don’t forget those that have the available credit and it’s more than your advance payments, you can claim the remaining credit on your 2021 return and may be entitled to a refund. If you’re divorced and you alternate custody and you aren’t entitled to claim your child in 2021, you may want to unenroll so that you don’t receive an overpayment. Remember you can unenroll by going to the IRS Portal.
Did you guys get all of that. I hope so. But don’t worry, for 2022 there are no plans for expanding the credit or the payments so far.
Well thank you for hanging out with me to go over the Advance Child Tax Credit Payment. So, until next time this is Debra Marie the tax queen signing off. Bye!