On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021. Included in the plan was a provision allowing for the increase in the Child Tax Credits and the ability to receive advance payments of a portion of the credit. Some common questions regarding the credit and its reporting are listed below.
How much is the increased credit, and do I qualify to receive it?
For the tax year 2021, only the Child Tax Credit increased from $2,000 per qualifying child to $3,000 per qualifying child aged 6-17 years old and $3,600 per qualifying child under 6 years old.
To qualify for the increased amount, you must meet the following criteria:
- You filed a 2019 or 2020 tax return and claimed the Child Tax Credit OR
- You entered your 2020 or 2021 information via the IRS’ Economic Impact Payment Non-Filers tool.
- Your main house was located in the US for more than half the year.
- You have a qualifying child under the age of 18 at the end of 2021 who has a valid Social Security Number.
- Your income is under the threshold.
Is there an income limit to be eligible for the credit?
To qualify for the standard $2,000 Child Tax Credit, your Modified Adjusted Gross Income (MAGI) cannot exceed $400,000 for Married Filing Joint, $200,000 for Widow(er), Head of Household, Single and Married Filing Separate taxpayers.
For the increased Child Tax Credits of $3,000 and $3,600, your MAGI cannot exceed $150,000 for Married Filing Joint and Widow(er), $112,500 for Head of Household, and $75,000 for Single and Married Filing Separate taxpayers.
For these purposes, MAGI or Modified Adjusted Gross Income is your Adjusted Gross Income on your tax return plus any foreign earned income and any gross income from Puerto Rico or American Samoa. For most taxpayers, your MAGI will be the same as your AGI.
How do I receive the increased credit?
The American Rescue Plan Act of 2021 also included a provision that allows for half of the credit to be paid out to the taxpayer via monthly payments from July-December 2021. The other half of the credit will be claimed on the taxpayer’s 2021 tax return. Payments are sent out on the 15th of each month to the bank account on record with the IRS or via check unless the taxpayer has opted out.
Do I have to report it on my tax return?
The IRS will send out Letter 6419 in January 2022 to all taxpayers who received advance payments for the Child Tax Credit. The letter will include the total amount disbursed to the taxpayer in 2021. This amount will be needed to reconcile the credit on your 2021 tax return, so it is imperative to keep it with your tax records to have when it is time to file.
Will I have to pay back the advance payments I received if I do not qualify for the credits when I file my tax return?
Possibly. Taxpayers with no significant changes who are used to getting a larger refund will likely find they are getting smaller refunds for 2021. Additionally, taxpayers who are used to small refunds or balances due may find themselves owing a larger bill to the IRS this year. And if your adjusted gross income falls in between or exceeds the thresholds for the standard Child Tax Credit and the increased tax credit, you may find yourself having to repay any advance credits received.
However, there is protection for lower-income filers who may not qualify for the full credits. As long as your main home was in the US for more than half the year, you may be eligible for repayment protection if you meet the following criteria:
- Full repayment protection if your MAGI does not exceed $60,000 for Married Filing Joint and Widow(er), $50,000 for Head of Household, and $40,000 for Single and Married Filing Separate taxpayers.
- Partial repayment protection may apply if your MAGI is between $60-120k for Married Filing Joint and Widow(er), $50-100k for Head of Household, and $40-80k for Single and Married Filing Separate taxpayers.