The American Rescue Plan Act of 2021 (“ARPA”) included modifications to a number of existing tax provisions, including a significant overhaul of the child tax credit for the 2021 tax year. The ARPA increased the amount of the child tax credit and increased the maximum age of qualifying children. The credit phases out for taxpayers with modified adjusted gross income in excess of certain threshold amounts.
Advance Child Tax Credit Payments are early payments from the IRS equal to one-half of the taxpayer’s child tax credit expected to be claimed on the 2021 tax return. These advance payments were issued by the IRS in monthly installments from July 2021 through December 2021 (unless the taxpayer chose to opt out of the advance payments). The remaining half of the credit that was not received in advance is claimed on the taxpayer’s 2021 return when filed.
Advance payment amounts were based on an IRS estimate of the taxpayer’s 2021 child tax credit. If the total advance payments received is greater than the child tax credit allowed on the 2021 return, the taxpayer may have to repay the excess amount with the 2021 return. (For example, if a taxpayer received payments based on two qualifying children claimed on the 2020 return, but the taxpayer no longer had qualifying children in 2021, the advance payments received are added back to the taxpayer’s 2021 income tax, unless the taxpayer qualifies for repayment protection). Further, if a taxpayer was eligible for the child tax credit but did not receive any advance payments, the full credit amount can be claimed when filing the 2021 tax return.
IMPORTANT: For any taxpayer who received advance payments of the child tax credit, the IRS is required to provide written notice that includes the total amount of advance payments made during the 2021 year. This information is provided on Letter 6419, issued by the IRS in January 2022. For those filing joint tax returns, the IRS issued a separate Letter 6419 to each spouse. These letters are important information which should be provided to your tax return preparer with your 2021 tax documents. If the total amount of advance payments received by a taxpayer is not properly reported and reconciled on the 2021 tax return, processing of the return by the IRS will be delayed.
As always, please contact us if you have any questions regarding this issue. We appreciate the opportunity to serve you!