The 2021 Child Tax Credit and Advance Child Tax Credit

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If you have children who are 17 or younger you may soon receive Letter 6417 from the IRS detailing how much they are planning to send you in Advance of your 2021 Child Tax Credit. These payments will start arriving in July, and understanding how they are determined, and how they affect your 2021 taxes is vitally important. In the best case, you get some nice payments up front, with a potentially small impact on your 2021 refund. In the worst case, your income or child situation changes to the point where they advance you a bunch of money that you have to pay back out of your refund, or even creating a balance due. This LONG post is all about avoiding that.

First, lets cover the normal Child Tax Credit, but simplified, meaning it covers normal parent child relations and family situations. Seek help if you claim unusual children, though, if they qualified in 2020, they almost certainly qualify in 2021, even if they normally would be too old. So, if you got $2000 for a child in 2020, and nothing much has changed, they likely qualify for 2021.

Anyway, for children under the age of 17 at the beginning of the tax year, who you claim as a dependent, you got $2000 in Child Tax Credit in 2020. This amount was reduced by $50 for every $1000 you made above $400,000 (technically Adjusted Gross Income - but this is basically the total taxable amounts of income from your W-2's, businesses, and investments). If you weren't filing Married Filing Jointly, the threshold was $200,000 vice $400,000. Keep in mind the TOTAL Child Tax Credit is reduced by the $50, not $50 for each child - so more kids means your numbers drop slower and at effectively higher incomes. You could get up to $1400 of this amount even if your taxes were reduced to zero - meaning the $1400 was refundable, but you had to have earned income to get it, so parents with no income got nothing, even if the kids qualified.

Major changes to this for 2021 (and 2021 ONLY - it all goes back to normal in 2022) are that they raised the age by 1 year - to anyone under age 18. This is why kids who qualified in 2020 still qualify even if they normally would "age out". They also made the entire amount "refundable" regardless of income, so you can get the full amount even if you have no income, or your taxes reach zero. These changes apply regardless of income, so you get your $2000 as long as you meet the original income limits. Advance payments discussed below are also paid regardless of the lower income limits, but I'm waiting to talk about advance payments until the end.

The one big change that everyone will love - MORE MONEY has new income limits, but, again, even if you don't meet these lower numbers, you still get the original $2000 amount, but, if you meet the lower numbers, you get more money. The income limits are $150,000 if you are Married Filing Jointly, $112,500 if you file Head of Household and $75,000 if you file Single or Married Filing Separately. If you make above these amounts, your TOTAL Child Tax Credit (not per child) is reduced by $50 for every $1000 (or portion of $1000) you make above the limit, but not below the original $2000. The new, larger Child Tax Credit is $3600 for children 5 and under and $3000 for children 6 and older.

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Everything up to this point was simple, easy, and would make everyone happy when they filed their 2021 taxes and got unexpected money. So Congress had to go and mess it all up by trying to make you happier, sooner. For most people, this will be fine. You get some money up front, with a minimal impact on your 2021 refund. If the number of kids you claim is stable or increasing, and your income is steady, life should be pretty good. If you swap kids with an ex, make a lot more money in 2021, or have other weird situations, things can get dicey.

Basically, they are going to send you HALF of your expected Child Tax Credit in advance, spread over the last 6 months of 2021. They will base this on your 2020 tax return (or 2019 if 2020 not filed - updating once they process your 2020) and possibly other sources of data that aren't specified. They will send it where they sent your 2020 (or 2019) refund - so don't throw out the card you got from H&R Block or other tax company for your refund to be put on! So, if you have a kid under 6, and your income is below the above limits, they will send you $300 a month, starting on July 15 and ending on December 15th. If they are 6 or older, it will be $250. If you are above the income limits, it "should" be $166 per month - though I'm not positive on this. Those numbers are PER CHILD.

Now here is some weird math. Even if you are the perfect candidate, within the income limits and stable kid numbers, your refund is going to go down even if your 2021 return is identical to your 2020 return. Because half the new credit is more than your old credit would be. For every kid under 6, your refund (on the exact same numbers on your 2021 return as 2020 - changes will muck this up) will go down $200. For every kid 6 or over, it will go down $500. You will still have more money than 2020, you just get some in advance! Even weirder, if you only qualify for the old credit because you make too much money, your refund goes down by $1000 - because they sent you that amount in advance.

This sounds bad, but most people still win! People under the income limit get an extra $1000 or $1600 per kid. People with 16 year olds in 2020 don't lose $1500 because their kid turned 17. People who don't make a lot of money, who ordinarily only get $1400 of Child Tax Credit because they run out of taxes to offset, get the full amount. Even better, people with kids but no "earned" income, can get Child Tax Credit for the first time! If you are one of the people with kids and no earned income - you live on social security or disability for example, you might need to take action to get your credit - either file a 2020 tax return, or use the non-filer tool at irs.gov: https://www.irs.gov/credits-deductions/child-tax-credit-non-filer-sign-up-tool 

The IRS is going to send Letter 6417 to everyone eligible for an advance VERY SOON. This will detail how much they plan to send, and what you can do if things have changed.

EVERYONE UPDATE YOUR ADDRESS WITH THE IRS!!!! Use this form: https://www.irs.gov/pub/irs-pdf/f8822.pdf

I cannot overemphasize the importance of updating your address, even when weird crap like this isn't going on. You need to ensure the IRS can get a hold of you!

So is the payment taxable? No. Do you have to pay it back? Sort of.

If your situation changes between 2020 and 2021, such as your income goes up, your kid situation changes, or other weirdness happens, and the IRS sends you too much Child Tax Credit, it DOES come off your 2021 tax return - usually. Basically you report what they sent you in advance - keep track, or you'll have to wait for the IRS to send you Letter 6419 in January of 2022 to get the correct numbers. Then you calculate what you deserve, and you get the difference, or pay back the excess. There is a caveat based on income for people who claim fewer kids in 2021 than 2020, but it is quite complicated. You essentially get out of trouble if your income is below $60,000 filing joint, $50,000 Head of Household, and $40,000 Single or Separate. You can get some relief above those numbers, but it is very messy.

So what do you do if you expect your situation to change?

Income increasing above the thresholds: First, use traditional retirement accounts and Health Savings Account contributions to try to get below the limits. Second, use the IRS update tool (coming soon) to either opt-out of advance payments, or update your income. Even if you opt out, you will get the full amount you are entitled to on your 2021 tax return. Initially the tool will only allow you to opt out, but updating income, number of children, and marital status will come later.

Losing kids: If they die in 2021, they still count. If someone else is claiming them, use the forthcoming update tool to either opt out of advance payments, or update your children numbers.

Gaining kids or lower income: The IRS portal will allow you to update this information to increase the amount of advance payments. It's not up yet, so no link or details.

Divorced or divorcing: This is an opportunity to work with the other spouse to ensure the kids are on the return that generates the best results. Use Form 8332 to allow the non custodial parent to claim the child if their income qualifies them for more money - then split it! If you are actively divorcing, make sure what happens with advances is covered in your divorce decree by working with your lawyer AND tax professional. Stimulus payments were an unanticipated MESS for divorcing couples, so try to stay ahead of it for the Advance Child Tax Credit.

MORE ADVICE:

Watch out for SCAMS! If you filed a 2019 or 2020 tax return you shouldn't have to do anything to get your money and the only communication you should receive is Letter 6417 telling you what to expect and Letter 6419 telling you what you got. Chances are any emails, texts or phone calls are SCAMS!

When in doubt - opt out. If you aren't sure what your 2021 situation will end up being, use the soon to be published tool at irs.gov to opt out, and then get what you deserve when you file in 2021.

If you don't normally file a tax return, but have children under 18 living at home, seek advice on filing a 2020 tax return, or using the non-filer app.

Prepare for a lower refund, or, if you get a very small refund and have kids, you might owe. Either opt out, or save some money.

This is a GREAT year to pump up contributions to retirement accounts and Health Savings Accounts. This post is not the only thing affected by income. Daycare is a big deal in 2021 as well. Check it out HERE.

Report correct numbers on your 2021 tax return. The #1 cause for refund delays in 2020 was inaccurate reporting of stimulus payments.

Check out the IRS FAQ on the subject, and keep up to date on when the update portal comes available: https://www.irs.gov/credits-deductions/2021-child-tax-credit-and-advance-child-tax-credit-payments-frequently-asked-questions

Most Important - Talk to your tax dude or dudette about YOUR situation, and discuss any changes, ESPECIALLY property or investment sales that might impact your income.

Buy my books! Everyday Taxes 2021/2022 will be out in July and is indispensable for every taxpayer!

This post is over-simplified, but should work for most people. I will learn more as the payments and letters go out. There are some esoteric rules that will cause a few people not to qualify, so don't assume anything until you have talked to a qualified professional. I answer questions at taxadvisor@email.com for free (I will ask for a donation of some sort but do not require it). I also prepare taxes 100% remotely via the same email address if you are interested.