Advance Child Tax Credit Payments on the Way

The American Rescue Plan Act, signed into law by President Biden in March of this year, expanded the 2021 Child Tax Credit. The Internal Revenue Service will begin issuing 2021 Advance Child Tax Credits to those who are eligible, with monthly payments scheduled to start on July 15.

The credit applies only to taxpayers who have a “qualifying child.” For tax year 2021, a qualifying child is an individual who does not turn 18 before January 1, 2022, and who satisfies the following conditions:

1. The individual is the taxpayer’s son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendant of any of the above (for example, a grandchild, niece, or nephew).
2. The individual does not provide more than one-half of his or her own support during 2021.
3. The individual lives with the taxpayer for more than one-half of tax year 2021.
4. The individual is properly claimed as the taxpayer’s dependent.
5. The individual does not file a joint return with the individual’s spouse for tax year 2021 or files it only to claim a refund of withheld income tax or estimated tax paid.
6. The individual was a U.S. citizen, U.S. national, or U.S. resident alien.

Amount of advance payments

The total of the advance payments will be up to 50 percent of the Child Tax Credit. Advance payments will be estimated from information included in eligible taxpayers’ 2020 tax returns (or their 2019 returns if the 2020 returns are not yet filed and processed).

Dates of advance payments

Advance payments of the 2021 Child Tax Credit will be made monthly from July 15 through December 15 to eligible taxpayers who reside in the United States for more than half the year.

The advance credit phases out in increments of $50 for every $1,000 of income above the threshold amounts. Taxpayers not eligible for the advance credit will qualify only for the standard child tax credit, which is $2,000 per qualifying child up to age 17 and $500 for a qualifying child age 18 or a full-time student ages 19-24 (consistent with the 2020 tax year). The standard child tax credit completely phases out when AGI reaches $240,000 for single, married filing separate, and head of household filing statuses and $440,000 of AGI for married filing joint taxpayers.

The IRS has set up an online system to assist taxpayers. On the site, taxpayers can do the following:

1. Determine if they’re eligible for advance payments.
2. Manage their payments:
   1. Check to see if they’re enrolled to receive payments.
   2. Unenroll to stop receiving advance payments.
   3. Provide or update their bank account information for monthly payments starting with the August payment.
3. Submit information if they are not required to file a tax return.

Divorced and Separated Taxpayers

For divorced or separated taxpayers, determining which parent can claim a child for purposes of the child tax credit, head of household filing status and other tax benefits can be complex. In some cases, a child meets the relationship, age, residency, support, and joint return tests to be a qualifying child of more than one person. However, generally only one person can treat the child as a qualifying child for the purposes of claiming tax benefits (provided the person is eligible for each benefit).

The IRS provides guidance for determining which person can treat a child as a qualifying child in order to claim the tax benefits, applying the following tiebreaker rules:

• If only one of the person is the child’s parent, the child is treated as the qualifying child of that person.
• If the parents file a joint return and can claim the child as a qualifying child, the child is treated as the qualifying child of the joint filers (parents).
• If the parents don’t file a joint return but both claim the child as a qualifying child, the IRS will treat the child as the qualifying child of the parent with whom the child lived for the longest period of time during the year. If the child lived with each parent for the same amount of time, the IRS will treat the child as the qualifying child of the parent who had the higher adjusted gross income (AGI) for the year.
• If neither parent can claim the child as a qualifying child, the child is treated as the qualifying child of the person who had the highest AGI for the year.
• If a parent can claim the child as a qualifying child but no parent claims the child, the child is treated as the qualifying child of the person with the highest AGI for the year, but only if that person’s AGI is higher than the highest AGI of either of the child’s parents who can claim the child.

Please consult your Marcum tax advisor for assistance with any questions regarding the Advance Child Tax Credit.