As part of the American Rescue Plan Act signed into law in March 2021. the U.S. Government pledged to increase child tax credits for eligible taxpayers and make this a refundable credits. The biggest change to this credit is that it will begin being deposited into Taxpayers accounts from the 1st of July, 2021. Recently Commissioner Rettig of the IRS stated that they may struggle to begin deposits by that deadline given the delays at the IRS and the massive backlog of unprocessed returns. However, at a recent Committee meeting he did promise that they will begin paying out the credit on time. From that date there have been a few changes and a bit more clarity on some of the exclusions that can be taken by taxpayers. One of the main changes being the Unemployment benefits exclusion.
Advanced Refundable Child Tax Credit
Taxpayers will be eligible for the credit where they have a qualifying child claimed on their tax return for 2021. The criteria of a qualifying child are as follows and all must be met:
- Child has a valid Social Security number
- Child is under the age of 19 at 31 December 2021 (or under 24 and a full time student.)
- Child must be related to the taxpayer (Adopted and foster included)
- Child has lived with the taxpayer all year
- Child is a US Citizen or US Resident.
- Child must not be married and filing a joint return with their spouse.
Only one person can claim the child and so they cannot be claimed as a dependent on another person’s tax return. Where taxpayers have adjusted gross income above $75,000 ($150,000 MFJ0 they will not be eligible for the refundable advanced credit. Taxpayers above the AGI limit will still qualifying for the regular Child tax credit of $2,000 per qualifying child but it will not be advanced. The normal AGI rules apply to the regular credit as it being to be phased out and is allowed where AGI is above $200,000 ($400,000 MFJ)
What do I do?
Taxpayers need not do much to get this refundable credit as the IRS assure us that a check or direct deposit will go out to eligible taxpayers each month starting July 1, 2021. The amount your receive will depend on the age of your children and how many qualifying children you have claimed on your 2020 tax return. Taxpayers with children under the age of 6 will receive a credit of $300 per month for the last 6 months of the year. Children ages between 6 and 17 will receive a slightly lower credit amount of $250 per month.The remaining 6 months will be claimed on your 2021 tax return filed by April 15th, 2022.
Those who are not eligible for the refundable portion of the tax credit must wait to file their tax returns by the usual deadline to claim the $2,000 child tax credit or the $1,400 refundable portion.
What’s The Catch?
There are somethings taxpayer’s need to be aware of when the credit begins to be paid during the summer. The most notable item is that the IRS will be opening up a portal for taxpayers to Opt out or receiving the credit. Where taxpayers are not eligible for the credit and they begin receiving this, it will need to be paid back and penalties and interest may apply to the overpayment. This will be most important for Americans living overseas. The tax law for the new refundable portion of the tax credit directs us to certain criteria that must be met to the claim the Earned Income Tax Credit.
This criteria required taxpayers who have qualifying children to have been living in the United states for 6 months during the tax year, meaning that most American Expats are unfortunately excluded from claiming the refundable credit in July. The portal to Opt out of receiving this credit will be very important for expats who don’t want to pay back large amounts to the IRS with their 2021 tax return.
We should see this Portal go live around April or May time. To end with some advice; make sure you are familiar with the eligibility criteria, and if you need to opt out then please do so to avoid any unnecessary pains next April. Talk to us for more advice if you are unsure whether or not you qualify