The Child Tax Credit has been changed in a number of ways on 2021 tax returns. The dollar limit per child is increased from $2,000 to $3,600 for children under age 6 and to $3,000 for children ages 6 through 17. The age limit is expanded to 17-year-olds.
The increased amount of the credit has a lower income phase-out than the original $2,000 amount of the Child Tax Credit: starting at $75,000 for single, $112,500 for head of household filers, and $150,000 for joint filers.
The credit is now fully refundable. Half of the credit amount could have been received as advance payments during the last six months of 2021. If more is received as an advance payment than the taxpayer is entitled to on the 2021 tax return, the excess amount must be repaid with the filing of the return.
There is a safe harbor protecting up to $2,000 from being repaid for lower income taxpayers.
The advance payment creates a number of potential problems for taxpayers on the 2021 tax return:
The advance payments were based on income on the 2019 or 2020 tax return. If the taxpayer’s income increased in 2021, lowering the amount of credit to which the credit is entitled, the taxpayer may have to repay all or part of the advance payments. The taxpayer had the option to opt out of the advance payments if they felt they were not going to be entitled to them on the 2021 return.
The need to repay a portion of the advance Child Tax Credit on the 2021 return could create an under-withheld situation for taxpayers, with the possibility of owing an underpayment of estimated tax penalty.
Taxpayers should receive a Letter 6419 from the IRS documenting the amount of advance payments received and to assist in calculating the Child Tax Credit on the tax return.