Check Economic Impact Payments and Advanced Child Tax Credit

The IRS is encouraging individuals to take important actions during January to help them file their 2021 federal income tax returns this spring. Among these special actions are those related to the third Economic Impact payment and the Advanced Child Tax Credit payments that were made to eligible individuals during 2021. This column discusses some key items related to these payments for individuals to check on prior to preparing and filing  their 2021 federal income tax returns.

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Check on Advanced Child Tax Credit Payments

During the period July through December 2021, eligible families with children under the age of 18 received “Advanced Child Tax Credit” payments. Those families who received these monthly payments will need to reconcile the “Advanced Child Tax Credit” payments they received during the period July through December 2021 with the amount of the Child Tax Credit that they will be eligible to claim on their 2021 federal income tax return.

Sometime in January 2022, the IRS will mail IRS Letter 6419 to all recipients of the Advanced Child Tax Credit. IRS Letter 6419 will show the total amount of Advanced Child Tax Credit payments eligible individuals received during 2021. Individuals should keep IRS Letter 6419 with their tax records as well as any other IRS correspondence concerning the Advanced Child Tax Credit payments.

Those individuals who received via these advanced monthly payments less than the amount for which they are eligible can claim a credit for the remaining amount of Child Tax Credit on their 2021 federal income tax return. Those individuals who received more than the amount for which they are eligible will have to repay some or all of the excess payment when they file their 2021 federal income tax returns.

Reconciling the Advanced Child Tax Credit Payments on an Individual’s 2021 Federal Income Tax Return

Before discussing the reconciliation process with respect to the Advanced Child Tax Credit on an individual’s 2021 federal income tax return, it is important to explain the Advanced Child Tax Credit payments, including who is eligible for these payments and how the payments were made during the last six months of 2021.

Significant changes to the Child Tax credit resulted from passage of the American Rescue Plan Act (ARPA) in March 2021. These changes helped many eligible families get advance payments of the child tax credit. In particular, half of the total credit amount was paid in advance monthly payments (6 payments) between July 1 and Dec. 31,2021. An eligible individual will claim the other half of the credit when they file their 2021 federal income tax return.

To qualify for Advanced Child Tax Credit payments, an individual (and the individual’s spouse if filing a joint return) must: (1) Have filed a 2019 or 2020 tax return and claimed the Child Tax Credit on their return; (2) Lived in a main home located in the United States for more than half the year (lived in the 50 states or the District of Columbia); (3) Have at least on qualifying child who was under age 18 at the end of 2021 and who has a valid Social Security Number; and (4) Had 2020 (or 2019) adjusted gross income (AGI) below certain limits.

When an individual files their 2021 federal tax return during this spring, the individual will need to compare: (a) The total amount of the Advanced Child Tax Credit payments the individual received during 2021 with (b) the amount of the Child Tax Credit that the individual is eligible to claim on the individual’s 2021 federal tax return.

Compare Investment Options

Note that during January, the IRS will send all individuals who received any Advanced Child Tax Credit Payments IRS Letter 6419 providing them with the total payments disbursed to them during this six-month period. Upon comparing (a) and (b), the individual will face one of two possibilities, and consequently will have to perform one of two actions. These possibilities are:

• Excess Child Tax Credit. If the amount of the Child Tax Credit the individual is eligible to claim on their 2021 federal income tax return exceeds the amount of the Advanced Child Tax Credit payments the individual received, the individual can claim as a tax credit the remaining amount of their Child Tax Credit on their 2021 federal income tax return.

• Excess Advance Child Tax Credit payments. If the individual received in Advanced Child Tax Credit payments a total amount that exceeds the amount of the Child Tax Credit that the individual is eligible to claim for their 2021 federal income tax return, then the individual will need to repay the IRS the amount of the excess payment. The repayment will be in the form of a reduced refund or a larger amount of a balance due.

The question is: How can the total amount of Advance Child Tax Credit payments be greater than the amount of an individual’s Child Tax Credit? The answer is that the amount of Advanced Child Tax Credit payments that an individual received during 2021 was based on the IRS’ estimate of the Child Tax Credit amount that the individual properly would be eligible to claim for the 2021 tax year. The law required that this estimate be based on two primary sources of information:

1. The individual’s 2020 federal tax year return. If that return is not available, the individual’s 2019 federal income tax return is used.

2. Any updated information provided to the IRS during 2021, including information provided through the Child Tax Credit “Update Portal”. This portal allowed individuals during the period July through December 2021 to update with the IRS an individual’s Child Tax Credit eligibility information. This eligibility information included any changes in the number of an individual’s children, changes in the individual’s income, and changes in the individual’s filing status.

The following list provides examples of changes that could have resulted in excess Advanced Child Tax payments:

1. A qualifying child who resided with an individual sometime during 2021 but resided more than half of the 2021 tax year with a different individual

2. An individual’s income increased significantly in 2021 compared to what it was during 2019 or 2020

3. An individual’s filing status changes for 2021

4. An individual’s main home was outside of the United States for more than half of 2021.

IRS Schedule 8812 (Form 1040) is used to reconcile an individual’s Advance Child Tax credit payments. A portion of Schedule 8812 is presented here:

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Check on Economic Impact Payments

Individuals who did not qualify for the third Economic Impact Payment (paid by IRS to eligible individuals during March and April 2021) or who did not receive the full amount of the payment may be eligible for the Recovery Rebate Credit based on their 2021 tax information. To do so, they must file a 2021 federal income tax return.

Individuals who did receive the third Economic Impact Payment will need to know the amount of payment they received and “Plus-Up” payments they received in order to calculate their correct 2021 Recovery Rebate Credit amount when they prepare their 2021 federal income tax returns. By ensuring they use the correct amount of 2021 Economic Impact Payment, they will help avoid a processing delay that may slow down their refund if they are due a 2021 federal income tax refund.

Sometime in January 2022, the IRS will send IRS Letter 6475 to all individuals who received during 2021 a third Economic Impact Payment that contains the actual amount of the third Economic Impact Payment (and any “Plus-Up” payments received sometime during 2021. Individuals should keep IRS Letter 6475 and any other letters about stimulus payments with their tax records.

Understanding Eligibility for the Third Economic Impact Payment and the Recovery Rebate Credit

The third round of Economic Impact Payments was authorized by the American Rescue Plan Act of 2021 as an advance payment of the tax year 2021 Recovery Rebate Credit. The IRS started sending the third Economic Impact Payments to eligible individuals in March 2021 and continued sending payments throughout 2021 as 2020 federal income tax returns were processed. By law, all third Economic Impact Payments were issued by Dec. 31, 2021. Individuals who did not receive a third Economic Impact Payment or received less than the full amount may be eligible to claim a Recovery Rebate Credit on their 2021 federal income tax return.

The IRS sent additional (“Plus-Up”) payments to individuals who: (1) Already received a third Economic Impact Payment based on information from a 2019 or 2020 federal income tax return or information received from the Social Security Administration or the Veterans’ Administration and (2) Were eligible for a “Plus-Up” payment based on their 2020 federal income tax return.

Eligibility

Most eligible individuals did not need to take any additional action in order to get their third Economic Impact Payment. An individual was eligible for the full amount of the third Economic Impact Payment if they are: (1) A US citizen or a US resident alien (and filing a joint tax return with US citizen spouse); (2) Not a dependent of another individual; and (3) Had adjusted gross income (AGI) that is not more than –

• $150,00 if married and filing a joint return

• $112,500 if filing as head of household, or

• $75,000 if filing as single or married filing separate.

Payments were “phased out” (reduced) above specific AGI amounts. Individuals did not receive the third Economic Impact Payment if their 2020 or 2019 AGI was at least –

• $160,000if married and filing a joint return

• $120,000 if filing as head of household

• $80,000 if filing as single or married filing separate.

The third Economic Impact Payment amount was: $1,400 for an eligible individual with a Social Security number ($2,800 for married couples filing a joint return) plus $1,400 for each qualifying dependent with a valid Social Security number or Adoption Taxpayer Identification Number issued by the IRS.

Claiming the 2021 Recovery Rebate Credit

Those individuals who received the full amount of the third Economic Impact Payment need not take any action with their payment when they file their 2021 federal income tax return. They need not claim on their 2021 federal income tax return as income the amount of the payment.

But those individuals who did not qualify for a third Economic Impact Payment or received less than the full amount may be eligible to claim the 2021 Recovery Rebate Credit. Their eligibility was to be determined based on their 2021 AGI. Why would an individual not qualify for a payment or receive a partial payment? The most probable reason is that an individual’s AGI in 2021 was lower compared to 2020 AGI (or 2019 AGI, if that amount was used to determine the amount of the third Economic Impact Payment). Since the third Economic Impact Payment is based on 2021 AGI, the individual needs to file the 2021 federal tax return in order to figure the 2021 Recovery Rebate Credit and subsequently receive all or the remaining portion of Economic Impact Payment they had not received during 2021.

In calculating one’s 2021 Recovery Rebate Credit, the individual will need IRS Letter 6475 in which IRS reports the amount of the third Economic Impact Payment. Those individuals who know for a fact that they did not receive the Third Economic Payment (and will therefore not receive IRS Letter 6475 in January or February due to excess 2020 AGI) but who determine their 2021 AGI will be less than $150,000 (if married filing joint), $112,500 (if filing as head of household), or $75,000 (if filing single or as married filing separate) should file their 2021 federal income tax return as early as possible in order to receive the Recovery Rebate Credit. The Recovery Rebate Credit will reduce any federal income tax owed for 2021, thus adding to one’s 2021 federal income tax refund or lowering the amount of any balance due.

The Recovery Rebate credit is claimed on 2021 Form 1040 page 2 (line 30). A portion of the 2021 Form 1040 page 2 is presented below. Note line 30 “Recovery Rebate Credit”.