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July 15th was the first day many families received their initial advanced payment related to the Child Tax Credits. These credits are being disbursed ahead of the 2022 tax filing season to provide families with money now during the pandemic financial crisis, which they normally would not receive until filing their tax return next year. For many people, this is a welcomed monthly addition to their bank account, but for others, this advanced payment may have been issued in error and may be required to be paid back in 2022.
To ensure you are getting the right amount and understand what the Child Tax Credit really is, I have included below answers to 5 of the key questions you may have about these credits.
1. What are child tax credits?
Child tax credits are a normal part of each filing season. Depending on the number of dependents on your tax return and their ages, you receive a credit, a reduction to your initial calculated tax owed. In prior years, your credit would be calculated when filing your tax return for the year prior (i.e., in 2021, it would be calculated based on dependents and their age in 2020). For 2021, this has been changed.
As a part of the American Rescue Plan, which was passed in 2021, the new tax credits are being paid to taxpayers as a prepayment of the credit you would have received in 2022. The IRS, using your 2020 return (or 2019 if 2020 has not yet been filed), is estimating the number of dependents that you most likely will claim in 2021, and their ages, and then will provide families with a portion of this credit each month, starting July 15th.
2. How much of a credit can I get?
Child tax credits were previously a maximum of $2,000 per qualifying child under the age of 17 (determined based on the child’s age as of December 31st of each year).
Under the new tax regulations for 2021, child tax credits are now a maximum of $3,600 per qualifying child age 5 and under, and $3,000 per qualifying child age 6 through 17. If a child has turned 18 prior to December 31, 2021, they continue to be eligible for a $500 credit for other dependents. (If a child is in college or higher education, a child may be deemed a dependent up through age 24.)
3. Am I eligible for the credits?
Taxpayers were previously eligible for this credit if your modified adjusted gross income (MAGI) was below $400,000 for a married filing jointly (MFJ) tax return status or $200,000 for any other filing status (married filing separately (MFS), head of household (HOH) or single). If you are divorced, the custodial parent legally is entitled to the credit, unless there is a divorce agreement that provides for which parent receives the credit. For example, some parents agree to alternate the years in which they receive a tax credit.
Eligibility for the child tax credits is still based on MAGI and filing status. However, the IRS is using information that is currently available to them, from either a taxpayer’s 2020 or 2019 tax return. This is where a change in income or filing status in 2021 can potentially have a notable impact on your child tax credit eligibility.
The child tax credit begins to be reduced to the original $2,000 per child if your MAGI in 2021 exceeds $150,000 for MFJ status, $112,500 for HOH status, and $75,000 for single or MFS status. The credit can be reduced further below $2,000 if your MAGI for 2021 exceeds $400,000 for MFJ status or $200,000 for all other filing statuses.
4. What happens if my 2021 tax return is different?
Due to the limited information available to the IRS, they will not be aware if your 2021 tax return will be significantly different than your 2020 or 2019 return. Some questions to ask yourself about 2021 are: Is my income going to be higher? Will it now be over one of the income thresholds? Will my spouse or ex-spouse now be claiming our children? Will the number of qualifying children that I am claiming be different (either decreased or increased)?
If the answer to any of these questions is ‘yes,’ then it is important to take action now. The IRS is currently set to pay approximately half of the amount of the child tax credit they expect you to be receiving in 2021. If their calculation is no longer correct, the IRS may be paying you more than you are eligible for (or less in some cases).
Most importantly, the IRS has stated that, if they have paid you more than you are eligible for, they may require that these credits to be paid back as a part of your 2021 tax filing.
5. What do I do if I need to alert the IRS to changes?
Take action now. Speak to your divorce attorney and/or your accountant. The IRS has created a portal for taxpayers at https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021. This portal can be used to check on current and future payments, unenroll from the advanced payments, enroll new children, or even to make updates to your banking information if the IRS has incorrect or outdated information
By taking steps now, you can make sure you are receiving the proper credit amounts each month and save yourself the potential frustration having to pay back credits in 2022.
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Megan D. Muccio, CPA is the owner of Megan D. Muccio, CPA, PLLC www.mucciocpa.com and is a licensed investment professional. Her CPA business offers individual and business tax preparation and planning. As an investment professional, she helps her clients make sound decisions about their financial future. She specializes in advising clients on budgeting, saving, investing, and short-term and long-term planning. She can be reached at (631) 393-2888 and at megan@mucciocpa.com.
Megan D. Muccio is a Registered Representative offering Securities and Advisory Services through UNITED PLANNERS FINANCIAL SERVICES, Member FINRA, SIPC. Craig James Financial Services, LLC and United Planners are not affiliated.
