The IRS recently posted important updates to the frequently asked questions (FAQs) for the 2021 Child Tax Credit (CTC) and Advance Child Tax Credit (ACTC) payments and the 2020 Unemployment Compensation Exclusion. These updates reflect changes to tax provisions from The American Rescue Plan Act, which was enacted by Congress in March 2021. In this article, we’ll examine some of the key updates. Let’s get started!
1. The 2021 CTC
This legislation provides ACTC payments (early payments) from the IRS of 50% of the estimated amount of the CTC that taxpayers may properly claim on their 2021 tax return during the 2022 tax filing season. Taxpayers will claim the other half on their 2021 filed return.
Taxpayers can claim a CTC for each qualifying child who meets the appropriate criteria. For 2021, the CTC amount was increased from $2,000 to $3,600 per child for dependents 5 years old or younger and $3,000 per child for dependents 6 to 17 years old. Note that for 2021, the definition of qualifying child was expanded to include any child who has not reached age 18 before the end of 2021.
As part of the American Rescue Plan Act of 2021, taxpayers received ACTC payments on the 15th of each month from July through December 2021. Taxpayers had the option to opt out of receiving these advance payments, and for taxpayers with modified adjusted gross income (MAGI) above certain levels, the payment amount was phased out.
The updated CTC FAQs on the IRS website explain how taxpayers can use the CTC portal to give the IRS an estimate of their 2021 income. For 2021, the sum of ACTC payments the taxpayer received during the year will be deducted from the CTC on the taxpayer’s 2021 filed return. Taxpayers who receive ACTC payments that exceed the taxpayer’s allowable CTC for 2021 may have to increase the tax liability reported on their 2021 returns to repay the excess amount. Although repayment protection is available, it begins to phase out after MAGI reaches $60,000 for taxpayers who are married filing jointly, $50,000 for head of household and $40,000 for single or married filing separately. This could create wherewithal to pay issues for certain households.
The CTC FAQ section instructs taxpayers not to call the IRS because phone representatives don’t have information beyond what’s available on the IRS website. The areas of guidance regarding the CTC are as follows:
- Topic A: General Information
- Topic B: Eligibility for Advance Child Tax Credit Payments and the 2021 Child Tax Credit
- Topic C: Calculation of the 2021 Child Tax Credit
- Topic D: Calculation of Advance Child Tax Credit Payments
- Topic E: Advance Payment Process of the Child Tax Credit
- Topic F: Updating Your Child Tax Credit Information During 2021
- Topic G: Receiving Advance Child Tax Credit Payments
- Topic H: Reconciling Your Advance Child Tax Credit Payments on Your 2021 Tax Return
- Topic I: U.S. Territory Residents and Advance Child Tax Credit Payments
- Topic J: Unenrolling from Advance Payments
- Topic K: Verifying Your Identity to Manage your Payments
- Topic L: Assisting Individuals to Enroll for Advance Child Tax Credit Payments
- Topic M: Commonly Asked Shared-Custody Questions
- Topic N: Commonly Asked Immigration-Related Questions
- Topic O: Returning a Payment
2. 2020 Unemployment Compensation Exclusion
As mentioned above, The American Rescue Plan Act of 2021 provided certain relief to taxpayers. In addition to the modifications to the CTC, the legislation allowed individuals earning less than $150,000 of MAGI to exclude from their gross income up to $10,200 of 2020 unemployment compensation. For married individuals filing a joint tax return, the $10,200 exclusion applies to each spouse.
The IRS updated the 2020 Unemployment Compensation Exclusion FAQs this past month. These updates have been integrated with the rest of the 2020 unemployment compensation FAQs. Topic G, Q8 focuses specifically on taxpayers who receive a notice informing them that they may be eligible for an additional CTC:
Topic G: Receiving a Refund, Letter, or Notice
Q8. Why did I receive an IRS CP08 notice saying I may be eligible for the Additional Child Tax Credit? (added November 12, 2021)
A8. Because we made changes to your 2020 tax account to exclude unemployment compensation, you may be eligible for the Additional Child Tax Credit. In November and December 2021, the IRS is sending the CP08 notice to individuals who did not claim the credit on their return but may now be eligible for it. This notice is not confirmation that you are eligible. You are not required to file an amended return to claim the Additional Child Tax Credit if you reply to the CP08 notice. See Understanding Your CP08 Notice for more information.
It is expected further guidance will be made available closer to the individual tax filing deadline. Watch IRS.gov’s News Releases for Current Month and News Releases for Frequently Asked Questions pages for further updates.
Keep reading the Becker blog for more important updates that all accountants should be in the know of.
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Tara Fisher has been practicing tax for over 20 years. Her professional background includes working for the U.S. Congress Joint Committee on Taxation, the national tax practice of PricewaterhouseCoopers, the University of Pittsburgh and American University in Washington, D.C. She is a licensed CPA and holds both undergraduate and graduate degrees in accounting from the University of Virginia.
