Since July 2021, many parents across the U.S. have been receiving monthly payments as high as $300 per child from the IRS. These payments were created in the American Rescue Plan passed in early 2021 designed to provide economic relief to low- and moderate-income taxpayers. For now, the changes made to the Child Tax Credit only apply to the 2021 tax year, although it remains to be seen if these changes will be applied to future tax years.

The Child Tax Credit (CTC) has maintained its regular requirements for filers:



• Children claimed must be related to you or have lived with you for at least six months of the year
• Children claimed must be a U.S. citizen, national, or resident alien and must have a Social Security Number (SSN)
• Child name, DOB, and SSN must be included on the return
• Children must be claimed as a dependent on your return
• The CTC phases out incrementally if adjusted gross income (AGI) is over $400,000 for joint filers or $200,000 for head of household filers. The credit is reduced by $50 for each $1,000 in AGI over these limits

In past years, including 2020, the CTC could be claimed only for children ages 16 and under for a maximum of $2,000 per child, depending on household income. In addition, to claim the credit, families had to meet a minimum earned income of $2,500 for the year. There was also a limit on how much of the credit was refundable in prior years. For lower-income individuals with children, up to $1600 of the total $2,000 credit could be refunded.

For 2021 many of the barriers to the credit for lower-income families have been removed, while additional caps were added for adjusted gross income (AGI) to target the relief toward lower-income Americans. This means that high-income families are less likely to see a significant financial benefit from the 2021 changes aside from the monthly payments.

For the 2021 tax year, the following changes were made:

• Children age 5 and under can be claimed for a maximum benefit of $3,600
• Children ages 6 to 17 can be claimed for a maximum benefit of $3,000. This brings the age for eligible children up from 16 in prior years
• Six monthly advance payments beginning in July 2021 were made to taxpayers who claimed the credit on their 2020 return (or if they did not file in 2020, based off their 2019 return). These payments were made to total half of the predicted eligible amount for the year
• The CTC is fully refundable, unlike in prior years when there was a cap on how much of the credit could be paid out as a refund
• No minimum income requirement, allowing taxpayers with very low or no income to still claim the credit
• Additional income caps were added:
• The full CTC can be claimed by married couples filing jointly with income under $150,000, and head of household filers with income under $112,500
• Families whose income exceeds these maximums can still claim the regular $2,000 credit if they are married filing jointly with income under $400,000, or head of household filers with income under $200,000. Additionally, these families can claim a portion of the enhanced credit based on the difference between their AGI and the limit on their filing status. The amount of the enhanced credit is reduced by $50 for each $1,000 in AGI over these limits. This reduction only applies to the enhanced credit and will not cut into the original $2,000 credit which is still adjusted based on how much the filers’ AGI exceeds the original income limits.
  

Whether you received advance payments of the 2021 Child Tax Credit, or you did not receive payments but you qualify for the credit or a portion of the credit in 2021, you can still claim it on your 2021 tax return.

The CTC does not count as income, despite the advance payments, so long as you qualify for the credit on your 2021 return. It will not affect your eligibility for income-based government programs such as the Supplemental Nutrition Assistance Program (SNAP) and will not affect your gross income. Instead, the advance payments must be reconciled against the total credit due to you on your 2021 return.

By January 31, 2022, the IRS will mail out a notice of the amount of advance CTC payments you received in 2021. This notice should be kept with your tax records to help you file your return. Advance payments totaling half of your estimated qualified credit were sent out monthly beginning in July. This means that if you qualified for a total credit of $3,600 in 2020, you should have received six monthly payments of $300. When you file your return, you will need to reconcile all the advance payments you received with your total qualified credit. If the amount you received in advance payments was less than the total you are qualified for, you can claim the excess due to you on your return. If the payments exceeded the total amount due to you, you may need to pay a portion back to the IRS depending on your income.

Families with lower income will not need to pay back any overpayment for 2021, while higher income families who have received an overpayment will need to calculate how much of the overpayment is due back to the IRS. This means that head of household filers with an AGI of $50,000 or less and joint filers with an AGI of $60,000 or less will not be required to pay back any overpayment. However, filers with income over $100,000 for head of household returns, or $120,000 for joint returns will be required to repay the entirety of the overpayment.

For those with AGIs that fall in between these amounts, you will need to calculate your “repayment protection amount”. This is calculated by multiplying $2,000 by the number of children the IRS used to calculate your advance payments with minus the number of children used to claim the credit on your 2021 return. A percentage of the excess credit received beyond the repayment protection amount must be repaid to the IRS.

Overpayments that are protected from repayment to the IRS must be reported as additional income on your 2021 return.

Since the CTC was allocated to taxpayers based on 2020 tax returns, you may have received payments that you do not actually qualify for in 2021. For example, many divorced couples who share custody of their children claim the children as dependents on their separate returns in alternating years. In this case, you may have received advance payments for a credit that your ex-spouse (and not you) will be claiming for 2021. In this case, the individual who mistakenly received the advance payments will need to follow the repayment rules outlined above, while the individual who will be claiming the credit is still fully qualified to receive the full amount of the CTC.

While there is still discussion of extending these changes to the Child Tax Credit into future years, for now these rules only apply to the 2021 tax year. For most taxpayers, the credit will be simple to calculate on your 2021 return so long as you retain the documentation provided by the IRS over the course of the roll-out of the advance payments and following the close of the tax year. If you are having trouble understanding how the credit will apply to your specific circumstances, reach out to a trusted tax advisor to get clarity on the finer details of this credit.