Uncle Sam is handing out cash and it’s likely your clients will receive some of it! Be prepared to answer your clients’ questions about the expanded financial benefits of the American Rescue Plan, specifically the 2021 Child Tax Credits (CTC). Heads up, the IRS will start depositing cash payments into bank accounts on July 15th.
What You Need to Know
Two notable changes have been made to the expanded 2021 Child Tax Credits (CTC). First, over the past few years parent(s) received a $2,000 credit per eligible child at the time of filing their annual tax return. This year, the tax credit has been increased to $3,000 for each qualifying child age 6 to 17 and $3,600 for each qualifying child under 6.  Second, parent(s) may receive half of the tax credit paid in cash installments over the next six months (July through December) and may receive the remaining 50% tax credit on their 2021 tax return. Monthly payments will be $250 for children under age 18 and $300 for children under age 6.
The Finer Points
- Aside from having children who are 17 or younger as of December 31, 2021, families will only qualify for the expanded credit if they fall below certain income thresholds:
- $75,000 or less for single taxpayers
- $112,500 or less for heads of household
- $150,000 or less for married couples filing a joint return and qualified widows and widowers
- The IRS will deposit the monthly payments directly into the parent’s bank account. The recipient does not need to do anything if the number of dependents, the address and the bank account are the same as on record.
- Since the 2021 CTC will be distributed for six months versus twelve, the IRS explains :
Excess Child Tax Credit Amount: If the amount of your Child Tax Credit exceeds the total amount of your Advance Child Tax Credit payments, you can claim the remaining amount of your Child Tax Credit on your 2021 tax return.
Excess Advance Child Tax Credit Payment Amount: If you receive a total amount of Advance Child Tax Credit payments that exceed the amount of Child Tax Credit that you may properly claim on your 2021 tax year, you may need to repay to the IRS some or all of that excess payment.
Not everyone will need to repay overpayments. The American Rescue Plan contemplates this by providing a “safe harbor” for lower- and moderate-income taxpayers.  If individuals making less than $40,000 ($60,000 for couples filing jointly) receive an overpayment of the credit, they will not need to repay the amount, nor will it be garnished from wages.
- While the 2020 credit was partially refundable, the 2021 CTC is fully refundable, meaning the credit is refunded to the taxpayer, even if they have no tax liability. 
Is the Child Tax Credit Subject to Offsets?
Advance payments made under these new rules are not subject to offset for past-due child support, federal tax debts, state tax debts, and collection of unemployment compensation debts. However, the amount claimed on the taxpayer’s 2021 return as a refund would generally be subject to offset.  Although the advance monthly payments can’t be offset, the same rules don’t apply to a tax refund applicable to the Child Tax Credit taken when you file your return next year.
For example, if a parent’s actual 2021 child credits exceed the monthly payments they received, the difference may be refundable but can also be offset by back taxes, past-due child support, etc. 
Complications for Divorced or Divorcing Parents
The IRS will automatically assign the 2021 CTC to the parent who claimed the child or children on their 2020 tax return. This may be problematic if the parents alternate the tax benefits in even and odd years. In this circumstance, the parent who claimed the child(ren) will receive the tax benefit two years in a row because the monies deposited into their account are considered the tax benefit for 2021.
What can divorced parents do to address this issue? The easiest option is for the parent who claimed the dependent(s) in 2020 to opt out of receiving the monthly benefit. Thus, the parent who claims the child(ren) in odd years will claim them at the end of this odd-numbered year.
A second option, which will require more cooperation between the parents, is to work out an arrangement that allows for the parent receiving the money to use it to offset some of the other parent’s expense obligations. For example, if the parents equally share summer camp or back-to-school expenses, the parent who receives the money which technically “belongs” to the other parent, can use it to cover some of the other parent’s financial obligations and give that parent a credit for the monies received from the IRS. Additionally, in the Fall, the parent receiving the money can use it to offset extra-curricular activities or out-of-pocket medical expenses.
It is important to remind your clients that they will soon find themselves on the opposite side of the situation when the other parent claims the child(ren) in 2021 and they are entitled to the 2022 CTC benefit. According to the White House Press Secretary, the Biden administration has proposed extending the monthly payments for five more years. 
If parents are unable to work out the new challenges they face between themselves, I am here to help. In mediation, we can look at each family’s unique circumstances and come up with a creative and mutually agreed-upon solution to maximize their tax benefits and formulate a system that will work for them over the coming years.
 There are six conditions for a qualifying child. For details see, 2021 Child Tax Credit and Advance Child Tax Credit Payments — Topic B: Eligibility for Advance Child Tax Credit Payments and the 2021 Child Tax Credit | Internal Revenue Service (irs.gov)
Qualifying parent: To qualify for advance Child Tax Credit payments, the taxpayer (and their spouse if a joint return is filed) must have:
- Filed a 2019 or 2020 tax return and claimed the Child Tax Credit on the return; or
- Given the IRS their information in 2020 to receive the Economic Impact Payment
- A main home in the United States for more than half the year (the 50 states and the District of Columbia) or file a joint return with a spouse who has a main home in the United States for more than half the year; and
- A qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number; and
- Made less than certain income limits.
- A parent can receive the 2021 CTC regardless of employment status, even if the parent has no tax liability. There is no minimum income required to qualify.
What Is a Refundable Credit? A refundable credit is a tax credit that is refunded to the taxpayer no matter how much the taxpayer’s liability is. Typically, a tax credit is non-refundable, which means that the credit offsets any tax liability the taxpayer owes, but if the credit takes this liability amount down to zero, no actual money is refunded to the taxpayer. In contrast, refundable credits can take the tax liability down below zero and this amount is refunded in cash to the taxpayer.
The IRS has set up a tool to allow taxpayers to check whether they qualify for the Child Tax Credit Eligibility benefits, opt out and more: https://www.irs.gov/
The individual will need either their 2020 or 2019 tax return (if they haven’t yet filed for 2020). The IRS said if people don’t have a copy of their return, they may be able to use an estimate based on their W-2s or 1099s to determine eligibility.
If a parent did not file a 2019 or 2020 tax return, they need to utilize the IRS’ online Non-Filer tool to complete a simplified return, which will allow eligible individuals to register for advance Child Tax Credit payments, located: https://www.irs.gov/credits-