Editor’s Note: Allen “Al” Beatty, EA, CPA, MT is an Assistant Professor of Accounting at Wilmington College who writes a periodic tax column for the News Journal. However, as he began writing on his next topic, he told the News Journal that 2018 WC Accounting grad Tara (Karnes) Hathaway “had authored an article on the same subject for her accounting firm Maloney & Novotny! I thought why replicate the wheel when she has it put together? Tara was an outstanding student who ran the Volunteer Income Tax Assistance site for the first two seasons at Wilmington College. Tara is a senior staff accountant at Maloney & Novotny.”

The American Rescue Plan Act of 2021 was signed into law by President Joe Biden on March 11, 2021. Monthly advanced payments of the Child Tax Credit are one of the hot topics among families in the $1.9 trillion coronavirus-relief package.

The law not only allows half of the credit to be received in monthly installments but makes the tax credit fully refundable and increases the amount that families are eligible to receive.

The Advanced Child Tax Credit (ACTC) payments are early payments of 50 percent of the estimated amount of the Child Tax Credit that you may properly claim on your 2021 tax return. Taxpayers will receive Letter 6417 in June 2021 to inform them of the amount of their estimated Child Tax Credit monthly payment.

Generally, for each qualifying child age 5 and younger, the monthly ACTC is $300 and for ages 6 to 17 the monthly ACTC is $250. Payments will start on July 15, 2021 and will be disbursed monthly through December 2021.

The American Rescue Plan Act also increased the amount of the Child Tax Credits. For tax year 2021, the Child Tax Credit increased from $2,000 per qualifying child to $3,600 for children 5 and under and $3,000 for children ages 6 through 17 at the end of 2021.

It is important to note that the $500 nonrefundable Credit for other dependents has not changed and is not included in the advanced payments.

If a taxpayer receives a larger advanced payment amount than they may properly claim, they must, generally, repay the excess amount on their 2021 tax return, unlike the economic stimulus payments.

There are safe harbor rules that apply to overpayments of the ACTC. The taxpayer’s income level determines how much must be paid back. For single taxpayers making $40,000 or less, Head-of-Household (HOH) taxpayers making $50,000 or less and couples making $60,000 or less, the safe harbor rule allows them to keep $2,000 per child that was sent in error.

The safe harbor rules do not apply to single taxpayers who make more than $80,000, HOH taxpayers making $100,000 or more and couples earning $120,000 or more per year.

It is important to note that the safe harbor rule only covers changes in the number of qualifying children, not changes in income.

To help individuals claim the correct amount of the ACTC on their 2021 return, the IRS will send Letter 6419 in January 2022 stating the amount disbursed to the taxpayer.

Eligibility

To qualify, you – and your spouse, if you filed a joint return – must meet all of the following:

1. Filed a 2019 or 2020 tax return and claimed the Child Tax Credit on the return or given the IRS information in 2020 to receive the Economic Impact Payment using the non-Filer tool; and

2. Maintained a main home in the United State for more than half the year or file a joint return with a spouse who has a main home in the United States for more than half the year; and

3. A qualifying child who is under age 18 at the end of 2021 who has a valid Social Security number; and

4. Made less than the phaseout income limits.

Qualifying Child

For the tax year 2021, a qualifying child is an individual who does not turn 18 before January 1, 2022, and meets the following conditions:

1. Taxpayers’ son, daughter, stepchild, eligible foster child, brother, sister, stepsibling, half-sibling, or a descendant of any of them.

2. The individual does not provide more than half of his or her own support and lives with the taxpayer for more than half of 2021.

3. The individual is properly claimed as a dependent.

4. The individual does not file a joint return with the individual’s spouse for tax year 2021.

5. The individual is a US citizen.

Phaseout

For the ACTC, the phaseout happens in two different stages.

First Phaseout: Reduced to $2,000 per child if the taxpayers modified AGI in 2021 exceeds:

• $150,000 for MFJ

• $112,500 for HOH

• $75,000 for single or MFS

It is reduced by $50 for each $1,000 by which your modified AGI exceeds the income threshold.

Second Phaseout: Reduced below $2,000 per child until modified AGI in 2021 exceeds:

• $400,000 for MFJ

• $200,000 for all other filing statuses

It is reduced by $50 for each $1,000 by which your modified AGI exceeds the income threshold.

Child Tax Credit Update Portal

Using the IRS’s Child Tax Credit Update Portal, taxpayers can update their information to reflect any new information that might impact their child tax credit amount, such as filing status or number of children. It can also be used to update their mailing address, bank account information and to report changes in income.

Additionally, the online portal can be used to elect out of the advance payments or check on the status of payments.

By electing out of the advance payments, taxpayers who are eligible will be able to claim the full credit when filing their 2021 tax return.

Here is a link to the Child Tax Credit Update Portal: https://www.irs.gov/credits-deductions/child-tax-credit-update-portal .

Conclusion

It is possible that the advancement of the Child Tax Credit could increase taxpayer’s income tax liability on their 2021 tax returns.

The ACTC may be problematic for self-employed taxpayers who use the credit to offset their federal income tax liability. It could also present challenges for taxpayers with changes in the number of qualified children or that have income fluctuations.

While the facts and circumstances of each situation may vary, it is important to consult with your tax professional to determine the most beneficial treatment.