For many Americans, Christmas came early this year in the form of monthly payments from the Federal Government. These payments were vital for many households struggling with the lingering effects of the pandemic, and, for the majority of American households, will not need to be repaid. However, there are several circumstances where people could find themselves having to repay all or a portion of these payments.
It’s important to understand the changes to the Child Tax Credit so you know what to expect on your 2021 Income Tax Return.
On March 11, 2021 the American Rescue Plan Act (ARPA) of 2021 was signed into law which drastically changed the mechanics and the details surrounding the Child Tax Credit (CTC). ARPA introduced some very key differences to the CTC that only applied to the 2021 tax year.
Prior to ARPA, the CTC for qualifying individuals with qualifying dependent children under the age of 17 at the end of the tax year was:
- Completely phased out of receiving any CTC with Modified Adjusted Gross Income (MAGI) greater than $440k Married Filing Joint (MFJ) & $240k Single
- Full amount of Credit: $2,000, in which only $1,400 may be refundable
After ARPA, the CTC for qualifying individuals with qualifying dependent children under the age of 18 at the end of the tax year is:
- Individuals completely phase out for MAGI of $440k MFJ & $240k Single
- Full amount of Credit: $2,000, in which all $2,000 may be refundable
After ARPA, the enhanced portion of the CTC for qualifying individuals with qualifying dependent children under the age of 6 at the end of the tax year is:
- Individuals completely phase out for MAGI of $182k MFJ & $107k Single
- Full amount of Credit: $1,600, in which all $1,600 may be refundable
After ARPA, the enhanced portion of the CTC for qualifying individuals with qualifying dependent children ages 6 through those under the age of 18 at the end of the tax year is:
- Individuals completely phase out for MAGI of $170k MFJ & $95k Single
- Full amount of Credit: $1,000, in which all $1,000 may be refundable.
It is important to note that the enhanced portion is in addition to the CTC, meaning that a qualifying taxpayer could potentially receive up to $3,600 for a qualifying dependent in 2021.
Lastly, what made the 2021 CTC so different than years prior is that individuals who qualified based off of their 2019 or 2020 filed income tax returns were automatically enrolled in receiving half of 2021’s calculated credit as monthly installments in 2021 starting in July of 2021. As such, a qualifying taxpayer who was to receive $3,600 for a qualifying dependent in 2021 would have generally received $300/month for a total of $1,800 in 2021 as advanced credits and will receive the remaining $1,800 on their 2021 Income Tax Return filed in 2022.
Individuals who preferred not to receive any monthly advanced payments and unenrolled through the ‘Child Tax Credit Update Portal’ will generally receive the full amount of the credit when they file in 2021.
Individuals who qualified for the CTC based off of their 2019 or 2020 filed income tax returns will receive Letter 6419 in January of 2022. This letter will indicate the total amount of CTC payments that were disbursed to you in 2021. Be sure to provide Letter 6419 to your tax preparer during tax season as it will help determine if any portion of the advanced credit will need to be paid back.
Individuals therefore could find themselves in a couple situations:
- Those who qualified based off of their 2019 or 2020 returns and only qualified for a lesser calculated amount in 2021: These individuals will have to pay back a portion or all of their advanced credit on their 2021 tax return. Individuals who do not qualify for any credit in 2021 and whose MAGI is greater than $120k MFJ and $80k Single will have to repay their entire advanced credit amount on their 2021 Tax Return.
- Those who did not qualify or qualified for a lesser amount based off of their 2019 or 2020 returns and now qualify for a larger calculated credit in 2021: These individuals will receive an additional amount of credit on their 2021 tax return.
As such, it is important to understand how the changes to the Child Tax Credit will affect your individual tax situation due to the nuanced phase-out rules and the advanced monthly payments. Because of these changes, many individuals could find themselves faced with a tax bill in April 2022 when customarily they are used to receiving a refund.
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If you have questions about the changes to the 2021 Child Tax Credit or need assistance understanding if you qualify, we can help. Reach out today to learn more.
