The future of the Child Tax Credit

Editor’s note: In July 2022, the IRS provided an update to its Frequently Asked Questions’ page on the Child Tax Credit and Advance Child Tax Credit. Download the PDF for more information.

Advance Child Tax Credit (ACTC) payments were one of the cornerstones of President Biden’s American Rescue Plan to help bolster American families’ budgets during COVID-19. The payments are poised to make an encore in 2022 as part of the currently stalled Build Back Better Plan legislation. The IRS recently sent the last payment to families receiving these credits and, in tandem, also sent letters explaining to some taxpayers that they may need to repay some amounts.

Needless to say, all of the actions related to the ACTC are likely to add complexity to tax returns for practitioners—and confusion for clients. This overview of frequently asked questions and future considerations for these credits will help you get a clearer view of key issues.

The last of six monthly advance payments of these credits arrived in mailboxes in early January 2022. However, some taxpayers are also receiving notices from the IRS indicating they may have to pay some of these credits back. Adding to this is ambiguity over what 2022 will bring on the Child Tax Credit (CTC).

This overview will help you and your clients understand how the ACTC may impact 2021 tax filings, and provide an overview of what the CTC, and potential advance payments of it, will look like in 2022.

Quick facts and key considerations

Early payments of $300 were provided in monthly checks to taxpayers for each child ages 5 and younger, and $250 for children between the ages of 6 and 17. Eligible families received half of their 2021 credit; payments were issued in July through Dec. 2021. The other half will come after their taxes are filed. Some families earned up to $3,600 in 2021.

To qualify, the IRS requires recipients of the ACTC to have:

• Filed a 2019 or 2020 tax return, and claimed the CTC on the return, provided their information in 2020 to receive the Economic Impact Payment, or provided information in 2021 with the IRS’ non-filer “Submit Your Information” tool.
• Lived in a primary residence in the United States for more than half the year in 2021, or filed a joint return with a spouse who has.
• A qualifying child who is under age 18 at the end of 2021, has a valid Social Security number, and made less than certain income limits.

Payment amounts were based on the information contained in 2019 or 2020 federal income tax returns.

If your client is eligible for the CTC, but did not receive ACTC payments, they can claim the full credit amount on their 2021 tax return. Additional guidance on this can be found on the IRS website.

The total amount of the payments clients received during 2021 was based on the IRS’ estimate of a taxpayer’s 2021 Child Tax Credit. This means that if there was an overpayment, it might need to be repaid based on their 2021 tax return.

What the future holds

While the initial version of the Build Back Better Plan includes a full year of ACTC payments, the legislation is currently stalled. However, newer versions of the bill are being debated by Congress, and the fate of the more generous CTC and advance feature is undecided at time of publication. If the proposed legislation does not pass, the CTC would revert to pre-tax year 2021 tax law as follows:

• The credit will be reduced to $2,000.
• The credit is only partially refundable.
• The advance payment feature was not available.

Please refer to this fact sheet from IRS.gov for additional guidance on the Tax Year 2021 Child Tax Credit. Remember that this credit is not considered income and should not be reported as such on a client’s tax return. 

Take some time now to prepare yourself to file returns reflecting the ACTC payments, and educate your clients about what the impact may be for them given their current situation.

Editor’s note: This article was originally published Feb. 11, 2022, and updated with new information on May 24, 2022, and July 19, 2022. Check out this page on IRS.gov for assistance with advanced issues related to the Child Tax Credit.