Jun 24, 2021 2021 Enhanced Child Tax Credit for U.S. Residents
As you have likely already heard, the American Rescue Plan has enhanced the Child Tax Credit for the 2021 tax year. It is important to note that this enhanced credit is only refundable if you resided in the U.S. for more than half of 2021. In addition, the IRS will begin sending out advanced monthly payments of this credit starting July 15th, 2021. If you receive an advanced payment but do not qualify, you must pay it back when filing your 2021 tax return. The IRS will be sending out a letter regarding your advanced child tax credit payments—please keep this for your records for when we prepare your 2021 tax return.
Taxpayers living outside the U.S. for more than half of 2021 do not qualify for these advanced payments. Many non-U.S. residents have been automatically enrolled to receive these advanced payments, even if filing their tax return using a foreign address, so it is important to proactively unenroll if you do not qualify. You can unenroll on the IRS site here, or by calling the IRS (800-908-4184) and asking them to unenroll you. To unenroll online, you will have to create an account with the IRS and verify your identity to complete the un-enrollment process. At this time, the IRS has not made this process simple for those without U.S. phone numbers or U.S. identification. Since this is all new, we hope that the IRS will resolve the issues to make it possible for non-U.S. residents to unenroll. If you do end up getting a payment to which you are not entitled; you may want to consider making a 2021 estimated tax payment to pay it back to avoid having to deal with it when it comes to filing your 2021 tax return.
The IRS recently published a comprehensive FAQ on this credit, which continuously updates and is a great reference tool. Below, we wanted to answer some of the more common questions to help you understand your eligibility.
Who qualifies for the credit?
Taxpayers with dependents aged 17 and under that meet certain income limitations outlined below may be eligible for this enhanced child tax credit. To get an advanced payment of this credit, you must be a U.S. resident for more than half the year, and the credit is only refundable if you are a U.S. resident for more than half the year
How much is the enhanced credit?
This enhanced child tax credit for 2021 is $3,600 per child under age 6 and $3,000 per child between ages 6 through 17.
Note that this now includes 17-year-olds—previously, they were not included in the definition of dependents for child tax credit purposes. In addition, this credit is fully refundable and has no earned income requirement, as long as the taxpayer is a U.S. resident for more than half the year.
How much is an advanced payment?
The advanced payment of the credit is equal to half of your estimated 2021 child tax credit, split into 6 monthly installments, while will begin on July 15th, 2021. As we mentioned above, taxpayers who did not reside in the U.S. for more than half of 2021 are not eligible for the advanced payment, as the enhanced child tax credit is not refundable for them.
What are the income limitations?
This enhanced credit applies to taxpayers with adjusted gross income below $75,000 for single/married filing separate, $150,000 for married filing joint, and $112,500 for head of household. Above these threshold amounts, the credit begins to phase out.
The existing child tax credit rules will run in tandem with this child tax credit, so there are two thresholds in play. The above is the threshold for the enhanced credit.
The advanced payments are made based on income on your 2019 or 2020 returns—whichever the IRS has on file. Therefore, if you expect not to qualify based on actual 2021 income, you will likely want to unenroll from the advanced payment to avoid having to pay it back with your 2021 tax return.
What if I exceed the income limitations for this new enhanced credit? Can I still qualify for the “old school” child tax credit?
Yes. In 2021 there will be two child-tax credit thresholds with which to deal. The existing income thresholds of $400,000 married filing joint and $200,000 for all other filers still apply for the regular child tax credit of $2,000 per child, with $1,400 of that being refundable.
What if my income decreased in 2021, or a new child was born? Can my advanced payment be adjusted accordingly?
Possibly—the IRS has announced they will soon provide a portal to add a child or adjust your expected 2021 income to get the advanced payments. When this becomes available—please remember to use this only if you are a U.S. resident for more than half of 2021!
What if I was a U.S. resident in 2021, received the advance payments but qualify for a lower credit based on my 2021 tax return. Will I have to pay back the excess?
Possibly—depending on your Adjusted Gross Income (AGI). However, the IRS has come out with repayment protection for certain low-income taxpayers who are U.S. residents and got a larger advanced payment than they are eligible. This protection would eliminate the requirement for these eligible taxpayers to pay back the full advanced payment they received that they do not qualify for based on their 2021 income. See the IRS site for more detailed information.
Note that this repayment protection only applies to U.S. residents and does not apply to taxpayers who live outside the U.S. and erroneously receive the advanced payments.
What if I received an advanced payment, but I am not a U.S. resident?
If you received the advanced payment but were not entitled to it, you will need to pay it back with your 2021 tax return. Therefore, it would be best if you tried to unenroll on the IRS site as soon as possible.
What if I live outside the U.S.? Is any of this relevant to me?
Taxpayers who are non-US residents can get this enhanced credit under the existing earned income rules, and only as a nonrefundable credit. The existing $1,400 refundable credit is still in place for those who do not qualify for this enhanced refundable credit due to living abroad or those whose AGI is phased out under this enhanced credit but qualified under the existing rules. The current rules have a higher AGI threshold of $200,000 for single/married filing separate and $400,000 for married filing joint, but this is only in effect through 2025.
What’s the difference between a refundable and a nonrefundable credit?
A refundable credit is a credit you will receive as a refund if you do not have a tax liability.
A nonrefundable credit is a credit that will offset any tax liability you have, but any excess credit will not be paid out to you as a refund.
How do I unenroll from the advanced payment of the child tax credit?
You can unenroll on the IRS site here, or by calling the IRS (800-908-4184) and asking them to unenroll you. If you file a joint tax return with your spouse, you must each unenroll separately.
To unenroll online, you will have to create an account with the IRS and verify your identity to complete the un-enrollment process. At this time, the IRS has not made this process simple for those without U.S. phone numbers or U.S. identification. Those who are unable to use the online system will need to unenroll by phone instead.
To unenroll by phone, you will need to verify your legal name on the account, social security number, current mailing address, and date of birth. You should anticipate long wait times before reaching an IRS representative.
When is the deadline to unenroll?
The deadline to unenroll for the first payment is June 28th, 2021.
Below is a chart from the IRS site of the unenrollment deadlines for each monthly payment
I was a U.S. resident for more than half of 2021, but I did not have a 2020 filing requirement—can I still get the advanced payments?
Yes—you can use the nonfilers tool on the IRS site to provide your information if the IRS does not have a 2019 or 2020 tax return for you (because you were not required to file). If you previously used an IRS non-filers form, you do not need to do this again—they have your information already.
