While individuals are in the process of preparing their 2021 federal income tax returns, the IRS is encouraging them to check whether they received Child Tax Credit payments and the third Economic Impact Payments during 2021.
The purpose of this check is to confirm they were eligible to receive either or both payments. Also, those individuals who did not receive either or both payments may be eligible to receive these payments in the form of a tax credit when they file their 2021 federal income tax return.
This column discusses what steps individuals must take to confirm receipt of either or both of these payments. Also discussed will be what happens when an individual received either payment but in fact was not eligible for the payment due to higher-than-expected income. Likewise, the situation in which an eligible individual did not receive either payment but in fact was eligible will be discussed.
Checking on Advance Child Tax Credit Payments
Individuals who have children under age 18 during 2021 and living with them need to reconcile any advance Child Tax Credit payments that they may have received from the IRS via bank direct deposit during the period July 1 through December 31, 2021) with the amount of the Child Tax Credit that they are eligible to claim on their 2021 federal income tax return. There are two possibilities with respect to the amount of the Child Tax Credit that an individual can claim on their 2021 federal income tax return:
• Excess Child Tax Credit Amount. If the amount of the 2021 Child Tax Credit that an individual is eligible to claim on their 2021 tax return exceeds the total amount of an individual’s advance Child Tax Credit payments they received during 2021, then the individual can claim the remaining amount of their Child Tax Credit on their 2021 tax return.
• Excess Advance Child Tax Credit Payment Amount. If the amount of an individual’s advance Child Tax Credit payments received exceeds the amount of Child Tax Credit than the individual is eligible to claim on their 2021 tax return, then the individual will need to repay to the IRS the excess amount.
For those individuals who received advance Child Tax Credit payments during the last six months of 2021, the IRS should have sent to them earlier in 2022 IRS Letter 6419. Letter 6419 provides the total amount of advance Child Tax Credit payments disbursed to individuals eligible to receive these payments during 2021.
This letter should be kept with one’s tax records and will be needed when preparing one’s 2021 federal income tax return. Those individuals who did receive advance Child Tax Credit payments during the last six months of 2021, IRS Schedule 8812 (Form 1040) (Credits for Qualifying Children and Other Dependents) will have to be completed and filed as part of their 2021 federal income return. One of the items asked for on IRS Schedule 8812 is the amount of advance Child Tax Credit Payments which is reported on Letter 6419.
See below in the highlighted portion of IRS Schedule 8812 (Part 1-B, line 14f) requesting the filer for the amount of advance Child Tax Credit payments received for 2021):
The question is: How can the total amount of advance Child Tax Credit payments be greater than the amount of an individual’s 2021 Child Tax Credit that he or she can claim? The following explains:
Advance Child Tax Credit payments were made to individuals whose adjusted gross income (AGI) were below certain limits. The AGI limits depended on an individual’s tax filing status (single, head of household, married filing jointly, or married filing separately). The amount of advance Child Tax Credit payments that an individual received during 2021 was based on the IRS’ initial estimate of the Child Tax Credit amount that the individual would be allowed for the 2021 tax year.
The laws required that this initial estimate was based on two primary sources of information, namely:
(1) The individual’s 2020 AGI as shown on their 2020 federal income tax return (if the return was not available, then the IRS used the individual’s 2019 AGI as shown on their 2019 federal income tax return; and
(2) any updated income information the individual provided to the IRS during 2021, including information provided through the Child Tax Credit Update Portal. The Child Tax Credit Update Portal allowed an individual to update with the IRS the individual’s Child Tax Credit information throughout 2021, including any changes in the number of qualifying children, changes in one’s income, and changes to one’s tax filing status.
Family and life situations can be fluid throughout any year. The following list presents examples of personal and family changes that could result in excess advance Child Tax Credit payments paid during the period July 1 through December 31, 2021:
• A qualifying child who resided with an individual may have changed homes during 2021 and resided more than half of the 2021 tax year with a different individual.
• An individual’s income may have significantly increased during 2021.
• An individual’s tax filing status may have changed during 2021. For example, from married filing joint to single; and
• An individual’s main home may have been outside of the U.S. for more than half of 2021.
As a result of these types of ordinary family and life changes, an individual may have received advance Child Tax Credit payments that exceeded the amount of Child Tax Credit that the individual is eligible to claim on his or her 2021 federal income tax return. That is the reason individuals receiving Letter 6419 are required to file Schedule 8812 with federal income tax return in order to reconcile any differences. Depending on any personal and family changes (as listed above) occurred during 2021, an individual may have to pay back some if not all of the advance Child Tax Credit payment. This pay back will come in the form of a larger balance due if the individual has a balance due (before filing Schedule 8812) or a reduced refund if the individual is due a refund (before preparing Schedule 8812).
Similarly, those individuals who did not get monthly advance payments during 2021 may be eligible for these advance payments in the form of additional Child Tax Credits when they prepare their 2021 federal income tax returns, including Schedule 8812. Some reasons an individual may be eligible for additional Child Tax Credits include lower than expected income during 2021 compared to 2020, and additional child dependents (for example, children being born during 2021).
Economic Impact Payments and Claiming the Recovery Rebate Credit
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The third round of Economic Impact Payments was authorized by the American Rescue Plan Act of 2021 as an advance payment of the 2021 Recovery Rebate Credit.
Beginning in March 2021 and continuing throughout the rest of 2021, the IRS made direct deposits of the third Economic Impact Payment (EIP) to the bank accounts of eligible individuals. Direct deposits of up to $1,400 per individual were made. If individuals were married, then each spouse would be eligible for the $1,400 payment. If the couple had any dependents, then additional payments of up to $1,400 per dependent was paid.
Similar to the advance Child Tax Credit, eligibility for the third EIP was determined by an individual’s AGI. An individual’s AGI had to be below certain limits, with the limits depending on an individual’s tax filing status. The IRS used an individual’s 2021 AGI as shown on the individual’s 2021 federal income tax return to determine eligibility for the third EIP. If a 2021 federal income tax return had not been filed, then the IRS used the AGI information from the individual’s 2020 or 2019 federal income tax return to determine eligibility for the third EIP.
Individuals who did not qualify for the third EIP or who did not receive the full amount (due to higher income during 2020 or 2019) may be eligible for the Recovery Rebate Credit based on their 2021 AGI information. To be eligible for the Recovery Rebate Credit, they will need to file a 2021 federal income tax return, even if they do not usually file a tax return. Information on how to claim the Recovery Rebate Credit may be obtained here.
Individuals will need the amount of their third EIP and any “Plus-up” payments received in order to calculate the correct 2021 Recovery Rebate Credit. Starting in January 2022, the IRS sent Letter 6475 to individuals who received the third EIP and any “Plus-up” payments received. Letter 6475 should be kept with their tax records.
Individuals who received the full amount of the EIP they were eligible to receive (based on lower 2019 or 2020 AGI amounts) but whose 2021 AGI increased to the extent that they would not be eligible for some or all of the EIP will not have repay any of the excess EIP payment.
Individuals can also log onto their irs.gov online accounts to securely access their EIP amounts.