The child tax credit- supercharged for 2021
Updated: Feb 5
This article from my blog at buengeraccounting.com
The child tax credit, one of the most generous and popular tax credit in the IRS code, has been supercharged for 2021 only thanks to the Covid-19 pandemic. The extra money could mean thousands of extra dollars in the hands of families, and it's been credited with greatly reducing child poverty. But it's also a minefield- the rules for claiming a dependent child are complex and a mistake with this one could mean either a greatly delayed refund or even required repayment of money already received. This looks to be the #1 issue of the 2021 tax season, and the IRS has had to issue a 26-page fact sheet covering dozens of questions that have come up about the tax credit.
Raising children is more expensive than ever- one reason why birth rates have dropped over the past 50 years. To combat that decline and encourage families to add children, congress added a child tax credit (CTC) to put a little more money in parents’ pockets at tax time.
The CTC started back in 1997, and it was originally $400 per child, raised to $500 in 1998. The credit was doubled to $1,000 in 2012 and doubled again to $2,000 per child in 2018. In 2021 only, as a part of the American Rescue Plan, it went up to $3,000 per child 17 or under ($3,600 for those under 6). And in 2025, unless congress acts it will fall back to $1,000. The changing rules and amounts have been a challenge for both tax professionals and taxpayers, with 2021 adding another new wrinkle.
For the second half of 2021, unless a family opted out, the IRS began mailing monthly checks as an Advanced Child Tax Credit. This has never been done before and is credited with helping boost monthly budgets. The advance, however, does reduce the amount of CTC available at tax time, which will lower some refunds. And here’s where it gets interesting.
What happens to the advances if a divorced couple alternates claiming of a child from year to year? What if a child is born in the middle of the year? And what if the advances get mailed out but never reach their target because the family moved? These are all problems that the IRS and families will have to deal with this year, with the bottom line being that those who can claim a dependent child 17 or under for 2021 getting the full CTC amount one way or another, as long as their income doesn’t rise above certain thresholds. (For a married couple the amount starts going down when income passes $150,000 and goes away completely if income passes $400,000).
The main challenge for parents this year is in reconciling those advanced payments on their 2021 tax return. If their numbers don't match those for the IRS, the refund will be delayed significantly and the burden may be on the parents to prove their figures. All recipients of the advances were supposed to get a notice in the mail (letter 6419) from the IRS detailing exactly how much was sent out, based on 2020 filing information. We are hearing that some of the letters may have had incorrect information on them, so it's up to each family to verify deposits from July through December. Those who set up online tax accounts with the IRS will have the ability to see all the information online regarding their CTC. You can set up an account here, but it will require a smartphone to get in.
For those who received the advances but don’t claim a child for 2021, they may have to pay back the amount of the advance. If their incomes are below $120,000 (Married Filing Jointly), $100,000 (Head of Household) and $80,000 (Single) there is some repayment protection.There was also a way to opt out of the advances, and if congress ever reauthorizes them there will be a way to opt out again.
The latest attempt to extend the enhanced CTC was in the Build Back Better Act, which passed the House but failed in the US Senate. It’s unclear if there are enough votes there to change things for 2022, so families need to expect the old 2020 rules to be back in place. But for now, when paired with the other two supercharged for 2021 child-related tax credits (Earned Income and Childcare) parents could potentially see over $10,000 in credits added to their refunds this year.