The American Rescue Plan, passed into law earlier this year, greatly expanded the Child Tax Credit for 2021 (but not beyond, at least not yet). The law increased the credit from $2,000 per child to $3,000 for children over the age of six, and from $2,000 to $3,600 for children under age six. It also raised the age limit from 16 to 17.
Families will get the full expanded credit if they make up to $150,000 for a couple filing a joint return or $112,500 for a family with a single parent, known in tax parlance as a Head of Household. At income levels above these, the enhanced portion of the tax credit begins to phase out.
To get the additional funds into the hands of taxpayers as quickly as possible, the law also provided that so-called Advance Child Tax Credit Payments be sent to eligible parents. In other words, rather than wait until the filing of a tax return to benefit from the credit, either in the form of a reduced tax debt or increased refund, the IRS was instructed to send out a part of the anticipated credit in advance.
These payments began in July, with many parents receiving up to $250 per month for each child age six to seventeen, and $300 per month for each under age six. The IRS determined eligibility and the amount of the payments based on information shown on the individuals’ 2020 tax return, if filed and processed, otherwise based on their 2019 tax return.
Therein lies a potential problem for parents who are not married and share custody of their children due to separation, divorce or otherwise, especially in situations where parents alternate between years which of them will claim the children for tax purposes. More specifically, under the Advance Payment program, the parent entitled to the credit in 2021 may not be receiving the advance payments when they should be, while the other parent who is not entitled to the 2021 credit may actually be getting payments.
For example, take the case of Jack and Jill, who have two children together but are no longer married, so they share custody. They have agreed that Jack is entitled to claim the kids in even-numbered years while Jill claims them in odd-numbered years. Since 2021 is Jill’s year, she will be entitled to the expanded child tax credit benefit.
However, since Jack claimed the kiddos on his 2020 return, and the IRS is using that return to determine who receives the advance payments, Jack will be the one who gets the payments, not Jill. Now Jack may be thinking, so what’s the problem? The problem is, when Jack goes to file his 2021 tax return and is not eligible for the child tax credit at all, he could have to pay back the funds he received. For many, that could be an unexpected and unpleasant surprise.
The IRS has a solution for this. It is advising parents in situations such as this to go the IRS website, IRS.gov, to unenroll from receiving the monthly payments using the “Child Tax Credit Update Portal”. This will stop the payments, limiting the potential problem. If Jack does this, but things change somehow and later he finds he is entitled to the credit, he can claim the full amount allowed when he files his 2021 tax return.
Jill, on the other hand, has the opposite problem, in that she is entitled to the enlarged credit, but because she couldn’t claim the children on her 2020 return, she will not receive the advance payments. While there is not a way to make such advance payments start for Jill, all is not lost. She will receive full benefit when she files her 2021 income tax return claiming the kids. Further, while Jack would be wise to stop the payments from coming to him, any failure on his part to do that has no effect on Jill receiving the credit.
There are many other facets surrounding the expanded Child Tax Credit and related advance payments as to how is eligible, how the credit is calculated, etc. The IRS has published helpful FAQs on its website that may be helpful to you. Just go to IRS.gov and search for “Child Tax Credit” to learn more.
Lane Keeter, CPA, is Office Managing Partner of the Heber Springs office of EGP, PLLC, CPAs & Consultants (a full-service financial firm with offices in Heber Springs, North Little Rock and Bryant) and past winner of The Sun-Times Reader’s Choice Award for Best Accountant