As the tax filing season begins, many taxpayers are receiving a new notice from the IRS (IRS Letter 6419) that they may not be familiar with but will need to complete for their 2021 tax return. The notice provides the amount of advance child tax credit payments as well as the number of “qualifying children” for tax year 2021. The current version of the Child Tax Credit (CTC) has been in place since the 2018 tax year following passage of the Tax Cuts and Jobs Act (TCJA). In 2021, passage of the American Rescue Plan (ARP) expanded the CTC for 2021 and provided for advance payments of the tax credit to families.
As household income increases, the CTC gets scaled back and eventually phases out above income levels of 200,000 for single filers and $400,000 for married couples filing a joint return.
Here is how the CTC works for tax year 2021:
*Modified adjusted gross income.
Qualifying child defined as not attained age 18 during the tax year. Examples of other dependents include dependent children over age 17 or elderly parents who can be claimed as dependents on the tax return. Income phaseouts are based on modified adjusted gross income (MAGI). The expanded CTC is fully refundable if the taxpayer lived in the United States for more than six months during 2021. To be refundable there is no requirement that the taxpayer had earnings from work in 2021. The amount of the credit is reduced by $50 for each $1,000 (or fraction thereof) of MAGI over the threshold amount. IRS 2022.
Advance payments in 2021
Beginning last July, certain taxpayers began receiving payments representing 50% of their child tax credit for 2021. They were generally based on information from the 2020 tax filing season. Some taxpayers may be surprised when filing their returns this year that their refund is lower than expected, or that they may actually owe taxes. The amount of the tax credit applied against taxable income on the tax return is reduced since many taxpayers received a portion of their CTC through monthly payments.
IRS Letter 6419 – A new notice for this tax season
To assist with filing the 2021 tax return, the IRS is sending Letter 6419, which reflects the amount of advanced child tax credit payments. This amount will be subtracted from the total CTC claimed on the 2021 tax return.
For example, consider a taxpayer who received $1,500 in advanced tax credit payments last year and is eligible to claim a CTC of $3,000 on their 2021 tax return. On the 2021 return (schedule 8812, Credits for Qualifying Children and Other Dependents), the taxpayer would claim a tax credit of $1,500 ($3,000 tax credit minus $1,500 in advance payments).
For married couples filing a joint tax return it’s important to note that both spouses will receive Letter 6419 reflecting their portion of advance tax payments. These amounts should be added together when completing the 1040 form. For instance, for a couple who received $1,400 in advanced payments, each may receive a Letter 6419 reflecting $700 reported in Box 1 (Aggregate amount of AdvCTC payments you received for 2021).
What does the CTC look like for 2022?
The expanded version of the CTC expired at the end of 2021. Negotiations in Congress to extend the expanded version of the CTC have faced challenges considering its cost and impact on the federal budget. If no legislative action occurs, the 2022 CTC will generally revert back to what was in place prior to the American Rescue Plan. In addition to the lower tax credit available and no advance payments, the age requirement for a “qualifying child” is reduced by one year from the 2021 version to under age 17 during the entire tax year.
The 2022 Child Tax Credit:
- $2,000 per “qualifying child” (who has not attained age 17 during the year); phased out as modified AGI exceeds $400,000 (married/filing jointly) or $200,000 (all other); $1,500 per child is refundable
- $500 nonrefundable credit for qualified dependents other than qualifying children (with same modified AGI phaseouts)
Review with a tax expert
As part of the tax preparation process, consider reviewing the new form with a tax expert to ensure the Child Tax Credit is claimed properly for 2021.
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