The Internal Revenue Service said today that it’s starting to send out information letters to the 36 million families who got advance child tax credit payments this year. It’s important to hold onto the letter. If you got advanced child tax credit payments, you’ll need the letter when you file your taxes for tax year 2021 in 2022. Treat it like any important tax form like a W-2 or 1099.
It’s called Letter 6419: 2021 advance Child Tax Credit (CTC). The letter verifies how much you got in advance payments in 2021, and the number of qualifying children used to determine the payouts.
In normal years, the child tax credit is calculated when you file your federal tax return. But there were three important child tax credit changes—for 2021 only—as part of the Covid-relief American Rescue Act in March.
First, the credit was made more generous. The enhanced credit provides parents with a $3,000 credit ($250/month) for every child age 6 to 17, and $3,600 ($300/month) for every child under age 6 (that’s up from $2,000 per dependent child up to age 16). Individuals earning up to $75,000 a year, heads of household up to $112,500 a year, and joint filers up to $150,000 a year are eligible to receive the full amount of the enhanced credit.
Second, for 2021, the child tax credit is refundable, meaning you don’t need income to receive it. Normally to take advantage of a tax credit you need income that it would offset.
And third, Congress instructed the IRS to pay out half of the credit as an advance in monthly installment from July through December.
For most taxpayers with children, the monthly payments were automatic. But the payment amounts could change depending on recently processed tax returns and other factors. The final true up will take place when you file your 2021 tax return next year.
In theory, it’s simple—you get half the credit in advance and the other half when you file your taxes. But there were complicating factors. The IRS based the payment amounts on your 2019 or 2020 tax return information. In the final calculation, it’s your 2021 income that matters. If you had a baby this year or if you got divorced, that too can affect the final credit amount. There were also administrative snafus including downward adjustments of the automatic payments for some taxpayers in October.
What’s in store for 2022? Don’t count on the enhanced credit and advance payments for 2022. The Democrats’ social policy plan, the Build Back Better Act, which includes a one-year extension of the enhanced child tax credit, has stalled with Senator Joseph Manchin holding out — in part because of the price tag and his position that there should be a work requirement to get the credit.
The Tax Cuts and Jobs Act of 2017 set the child tax credit at $2,000 per child through 2025—that’s what will be the law for 2022, absent Congressional action. That was a big jump from earlier. The child tax credit started as a $400 nonrefundable credit in 1997, then it went up to $500, then to $1,000.
Another way to check on the status of your child tax credit payments is through the IRS CTC portal. If you’re eligible for the child tax credit but didn’t receive any advance payments, you can claim the full amount of the credit on your 2021 tax return when you file in 2022. That includes families who don’t normally need to file a tax return.