What You Need to Know About the Advance Child Tax Credits This Tax Season
If you are one of the 36 million American families who received Advance Child Tax Credit payments this year and have questions about how that will affect your 2021 tax filing you are not alone.
The COVID-19 relief bill gave a boost to the Child Tax Credit, from $2,000 to $3,600 for kids under six and $3,000 for each child between six and 17. Many parents already received half of those Child Tax Credits in the form of six, monthly checks that started hitting bank accounts over the summer, and in 2022 will receive the remaining balance of the bonus Child Tax Credit.
In addition, if you had a baby in 2021 you should be eligible for another $1,400 stimulus check from COVID-19 relief funds after filing your 2021 tax return through the American Rescue Plan.
We sat down with Michael Duffy of Fletcher Tilton PC on Main Street in Worcester, a tax attorney since 2010, to answer the questions on many parents’ minds.
Q: What was the idea behind the Advance Child Tax Credit payments?
A: The Child Tax Credit has been in the tax code for a long time as a relief provision to assist families with children, but until 2021 the Child Tax Credit did not provide any benefit to qualifying families until they filed their income tax returns in the following year.
The idea behind the Advance Child Tax Credit payments was to put 50% of the estimated Child Tax Credit due to a family into their bank account before the end of the year via a series of monthly installments. Based on a family’s prior income tax returns, the IRS was instructed to automatically determine who would likely be eligible for benefits in 2021 and begin making monthly payments in July of this year. The U.S. Department of the Treasury estimates that Advanced Child Tax Credit payments have been paid to families having some 59 million children.
Q: Who was eligible to receive the payments?
A: In order to receive Advanced Child Tax Credit payments in 2021 a family needs to show it first qualifies for the Child Tax Credit. The Child Tax Credit provides a dollar-for-dollar offset to a family’s federal income tax liability and in some cases can provide a refund even if no tax is due. The amount of the Child Tax Credit was $2,000 per child in 2020 but for the 2021 tax year was increased to $3,000 per child and $3,600 for each child under the age of six. In order to qualify for a Child Tax Credit, a family needs to have a child who is under the age of 18 at the end of 2021, the child needs to live with them, and the family has to provide at least half of the child’s total yearly financial support.
The Child Tax Credit is designed to provide an incentive for families with incomes below certain thresholds. For families with annual joint spousal incomes over $150,000 or $112,500 for head of household filers, the amount of Child Tax Credit they are eligible for is reduced or eliminated altogether. The IRS used the most-recent available data to determine which families were likely to qualify for the Advanced Child Tax Credit payments in 2021. This information was mainly how much income and how many children a family reported on their 2019 or 2020 income tax returns. For families that did not file income tax returns in 2019 or 2020, the IRS created a portal for families to notify the IRS if they are eligible to receive advanced payments.
Q: What does this mean for doing your 2021 taxes - will it change or add anything to the process?
A: A family may not know with certainty whether they are eligible to receive the Child Tax Credit, nor the amount of the credit, until the end of the year. This is especially the case for families with incomes over the income phase-out threshold of $150,000 or $112,500 for head of household. Because the IRS is using old information to determine whether a family will qualify for the Child Tax Credit, and how much credit they may be eligible for, the process has the potential generate a bad estimate.
When families file their taxes for 2021, they will need to take into account the amount of Advanced Child Tax Credit they have already been provided during the year. Because this portion of the Child Tax Credit has already been paid, it will reduce the potential refund available. If, for whatever reason, the family determines it qualifies for less Child Tax Credit than the IRS estimated and already paid out, it is possible that a portion of any Advanced Child Tax Credit already received may need to be paid back.
Q: Will you get less Child Tax Credit back than usual if you received the Advanced Child Tax Credit this year?
A: The Advanced Child Tax Credit is just a portion of the estimated Child Tax Credit a family is entitled to, paid out before their annual tax return is filed. Receipt of the Advanced Child Tax Credit will reduce the Child Tax Credit a family is entitled to receive as a tax refund the following year, but ultimately will not impact the total amount of tax credit they are eligible for under the tax code. Because the Child Tax Credit was increased from $2,000 per child to $3,000 or $3,600, and because the advanced portion is only 50% of the total estimated credit, most families will likely receive an additional Child Tax Credit refund when they file their 2021 income tax returns.
Q: What about people with children born in 2021, are they able to receive the tax credit next year if they didn't this year?
A: The Child Tax Credit provides an incentive for families with qualifying children who were living at any point during the tax year. This includes children born on December 31st and children who may have died during the year. Of course, the IRS will likely not know about a birth in time to pay out any Advanced Child Tax Credit, as the estimates are generally based on a return filed for a previous year.
Q: How was Advanced Child Tax Credit beneficial to families, especially during the pandemic and people feeling the financial ramifications from it?
A: The Child Tax Credit was expanded in 2021 and paid in advanced payments in part to combat any lingering economic anxiety resulting from the COVID-19 pandemic. A study released by the Poverty Center at Columbia University over the summer estimates that the expanded amount and Advanced Child Tax Credit together have worked to reduce the child poverty rate in the United States by up to 40%. Ultimately, we may not know the full impact of this program for some time, but surely there are a large number of families where an additional $300 per month in the latter half of the year has made a difference.
Without Congressional action, the Advanced Child Tax Credit and the expanded per-child benefit are set to expire at the end of 2021. Congress is currently debating whether to continue similar benefits for the 2022 tax year and beyond.