IRS Issues Advance Child Tax Credit Payments

Posted on: July 16th, 2021 by Mary Serbekian

The American Rescue Plan Act of 2021 (Act) temporarily expanded the Child Tax Credit (CTC) for the 2021 tax year. The Act also directed the IRS to issue advance payment of these credits to eligible taxpayers during the second half of 2021. The first round of advanced payments was issued on July 15, 2021 and will continue to be issued in monthly installments for the remainder of the year. Many of you may have already received the first monthly payment via direct deposit.

Pre-Act Child Tax Credit:

The CTC is $2,000 per qualifying child. Generally, a qualifying child is defined as a child under-age-17, eligible to be claimed as a dependent, and who is a U.S. citizen.

The $2,000 CTC begins to phase-out (is reduced) if your modified adjusted gross income (AGI) is over $200,000 if filing or over $400,000 if filing jointly. The otherwise allowable credit phases out at a rate of $50 per $1,000 of AGI in excess of the thresholds above.

CTC reduces a taxpayer’s tax liability dollar for dollar to the extent of the tax liability. If the credit exceeds the tax liability, the maximum amount of refundable credit is $1,400 per qualifying child.

2021 Expanded Credit under the Act:

The definition of qualifying child is broadened for 2021 to include 17-year-olds (i.e. child under-age-18).

The CTC is increased to $3,000 per child ($3,600 for children under the age of 6) for 2021.

However, the increased credit amounts are subject to their own phase-out rule. This results in two sets of phase-out rules for CTC for 2021:

The increased CTC amount (the $1,000 or $1,600 amount) is phased-out for taxpayers with modified AGI of over $75,000 if filing single and $150,000 for joint filers. The increased credit phases out at a rate of $50 per $1,000 of AGI in excess of the threshold amount.
After applying that phase-out rule to the increased credit amount, the remaining $2,000 of CTC is subject to the existing phaseout rules (i.e. the $2,000 of credit is phased-out for taxpayers with modified AGI of over $200,000/$400,000 for joint filers under Pre-Act rules).

Taxpayers not eligible to claim an increased CTC in 2021 can still claim the regular $2,000 CTC, subject to the existing phaseout rules.

The CTC is fully refundable for most taxpayers for 2021.

Advanced Payments:

IRS has established a program to make monthly advanced payments (generally by direct deposit) equal to 50% of an eligible taxpayer’s 2021 CTC. Payments will be issued monthly in July 2021 through December 2021. To determine advance CTC payments, the IRS will look at the taxpayer’s 2020 tax return or their 2019 tax return, where 2020 has not been filed.

If you receive advance CTC payments that are in excess of the CTC actually allowable to you for 2021, you may have to repay the excess amounts. In other words, there will be a true up of credit eligibility with the 2021 income tax filing. For certain low and moderate income taxpayers, the excess may be reduced by a safe harbor amount. The IRS has also established a mechanism for taxpayers to elect out of receiving payment of the advance credit to avoid the potential of having to repay the advance.

The IRS has established the portal to manage the advance payments, including electing out, which can be found here: https://www.irs.gov/credits-deductions/child-tax-credit-update-portal

At Brown CPA Group, we are closely monitoring continuing developments and interpretations concerning new tax legislation. Please reach out to your Brown CPA Group professional team to discuss how we can assist with your tax and business needs.

Contributors: Barry Burchel, Tax Director; David Thibault, Managing Partner