By Cory Cuffley, CFP®, CPA, C(k)P®, CRPS®, AIF®

As we near tax season, some families will include this year’s Advance Child Tax Credit payments on their 2021 tax returns. As the IRS begins rolling out Letter 6419, 2021 Advance CTC, here’s what you should be on the lookout for as you file your taxes.

What Is the Advance Child Tax Credit?

As part of the American Rescue Plan, the federal government implemented a program called Advance Child Tax Credit (CTC). This program pays in advance half the total Child Tax Credit amount that can be claimed on the 2021 tax return. For most families, this was a $3,000 stipend for each child between 6-17 years old and a $3,600 stipend for each child under 6.

These payments were made each month beginning in July 2021. What makes the Advance CTC payments unique is that, instead of receiving the tax relief at the time of the annual tax refund, beneficiaries receive the money in advance, with the goal of stimulating economic activity during the COVID-19 pandemic. Since these payments were made prior to the tax refund, you must report any overages or shortages on your 2021 tax return.

CTC’s Potential Effects on 2021 Tax Returns

The other half of the Child Tax Credit that was not paid in advance can be claimed on your 2021 tax return. Families who were eligible to receive Advance CTC payments and did not get them can still claim the full amount on their return.

If the advance payments were distributed correctly (the amount you were eligible for matched the amount you received), then you do not need to report them on your tax return. However, if there were any discrepancies in your payment amounts, these discrepancies will need to be reconciled.

The IRS estimates Advance Child Tax Credit payments based on a combination of your 2020 tax return and updated information you provided in 2021. If you made a major life change in 2021 and didn’t tell the IRS, you may have received overestimated payments. A discrepancy may occur because of:

  • A child changing homes.
  • An increase in income.
  • Change in filing status.
  • Living outside of the U.S. for more than half the year.

One of two discrepancies would need to be reconciled on your 2021 tax return:

  • The amount of Advance CTC payments you are eligible for exceeds the amount you received. In this case, you can claim the remaining amount on your 2021 tax return and receive it with your tax refund.
  • The amount of Advance CTC payments you received exceeds the amount you’re eligible for. Depending on your income, you might have to repay the difference to the IRS. If your income is lower than $40,000 (single), $50,000 (head of household) or $60,000 (joint), you are not required to pay back any of the excess payment. If your income exceeds $80,000 (single), $100,000 (head of household), or $120,000 (joint), you are required to pay back the entirety of the excess payment. If your income falls between the non-payment and full payment brackets, your repayment amount is calculated based on the number of children you have.

How Do Advance CTC Payments Differ From Earned Income Tax Credits (EITCs)?

Advance CTC payments assist families with children, while EITCs aid lower-income families, although there are increased benefits for families with children. As previously mentioned, Advance CTC payments that have been properly calculated do not need to be reported on the 2021 tax return, while EITCs do. Finally, unlike the CTC advance payments, EITC payments occur once a year after the tax declaration has been filed.

Families who received Advance CTC payments throughout 2021 can still claim EITC on their tax report if their income falls within the approved range. EITCs, like CTCs, require a certain income level, approved Social Security number and “qualifying children” to receive full benefits.

Will Advance CTC Continue in 2022?

As of now, it is unclear whether Advance Child Tax Credit will be extended into 2022. A current one-year extension of the enhanced credit is included in the Build Back Better Act, which Congress has yet to pass.

Cory CuffleyCory’s primary responsibilities include working with the firm’s corporate retirement plan clients, providing participant education, and business development. He holds a master’s degree in Accounting and Professional Consultancy, and recently was honorably discharged as a member of the Pennsylvania Army National Guard. Cory enjoys spending time with his wife Megan, their daughter Claire, and their two dogs.