Oct 04, 2021

Big Changes to the Monthly Child Tax Credit

Kemberley Washington, CPA, a tax analyst with Forbes Advisor, joins us to discuss the monthly child tax credit. She goes in depth into who qualifies to receive it, whether taxpayers have to repay it, how eligibility is determined by the IRS, and more.

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By: Bill Hayes



Podcast Transcript

One major aspect of the American Rescue Plan Act that can use some exploration is the monthly child tax credit, namely, why was it decided that it was necessary at this time, who qualifies to receive it, do taxpayers have to repay it, and more. To take us through the details, today we are with Kemberley "Kemcents" Washington, CPA, a tax analyst with Forbes Advisor.

Before we get started, I wonder if you could tell us a little bit about “Kemcents.” I know it's your handle on social media, and I want to make sure that people can find you on there to get even more great information than what we're going to get today. Could you tell us a little bit about that?

[Washington] Kemcents, again, my name is Kemberly Washington. A little bit about my background: I started working for the IRS as a revenue agent criminal investigator many years ago, and then fast-forward a few years after that, I went through Hurricane Katrina during that time, and really started to just provide different resources, financial resources for the community, and thus fast-forward again, I ended up in the media, providing through social media, through news platforms, now through Forbes Advisor. I also do a TV show, a news segment rather, a few days a week at NBC WDSU in New Orleans and a whole host of other programs. That's a little bit of how Kemcents was developed and how it is today.

Can you give us some background on the monthly child tax credit and why it was decided that this aspect of the American Rescue Plan Act was necessary at this time?

[Washington] The child tax credit is nothing new and a lot of people are just learning more about it because it's been in the media a great deal lately, but it actually started all the way back in 1997. At that time, it was up to $400 that a person could claim per child under the age of 17. It was a non-refundable credit, which means that it only was able to reduce your tax liability. Today, of course, it is a refundable tax credit, which generally means that even if you don't know any taxes, you're able still to receive a refund. That's one of the advantages of the child tax credit.

Fast-forward through the years, the child tax credit has definitely evolved over the years. Just recently in 2017, the Tax Cuts and Jobs Act was passed and the child tax credit was actually increased up to $2,000 under the former President Trump's administration. Even during that time, if you had a dependent who didn't qualify through the Tax Cuts and Jobs Act, there was also an additional credit and still is a credit for other dependents formed where you can actually get $500. So, if you have a dependent that may not be your qualifying child for the child tax credit, you can get this $500 in addition. That's a couple of different things of how the child tax credit has actually formed throughout the years.

Fast-forward to 2021, now there's a lot of different changes with the American Rescue Plan. They have been expanded, increased, and now just for the year 2021, more individuals are claiming this credit, especially during this time with the monthly child tax credit payment.

You mentioned the word “payments” there, so it shoots us straight to this question: Can you take us behind the workings of the child tax credit payments? How will they be distributed? How much are they, and how long will these payments last?

[Washington] The biggest thing that people have to understand is this is for the first time in history, the first time that you're able to, a family can say, "Hey, I would like to get the child tax credit in the form of a monthly payment, instead of waiting to file my tax return on April 15th". For 2021 only, from July 15th through December 31st, or, well actually, December 15th, you're able to receive monthly payments and it's actually 50% of your credit that you can receive. You can claim the rest of it when you file your tax return next year.

How it works is that, for most families, you don't have to do anything. You're going to automatically receive this payment. It's available for children ages 17 and under –  before, the maximum age was actually 16. The amount has increased. It was just like I stated before, it used to be $2,000 under the previous tax law. However, now it's up to $3,600 per child under the age of six and $3,000 for children, ages six to 17.

Keep in mind that this is half-year's worth of credit. You can actually claim the rest of the credit when you file your tax return next year.

Who exactly is it that qualifies to receive the monthly child tax credit, and how will eligibility be determined by the IRS?

[Washington] The IRS is going to use your information that's on file, for instance, your 2019 or your 2020 tax return. Another thing that the IRS may use are non-filers tools. Those non-filers tools, you can go to irs.gov if you're typically not required to file a tax return. You can actually put your information or register rather with those different tools and then the IRS will send out your payments.

But it is typically based off of your income and your qualifying child. It has to meet certain criteria. So just to give you an idea for it, if you are a single person, your modified adjusted gross income, and I don't want to just throw that word out there and like, somebody might be listening and say, "What is that?" But that's just basically your income minus certain deductions. If you're single and if your modified adjusted gross income, often referred to as MAGI, is less than $75,000, you'll qualify for the full credit.

If you're married, it has to be less than $150,000, and you'll qualify for the full credit. Now give or take if you make more than that, you still may qualify, but you'll get a reduced credit amount. That's something that you want to keep in mind and up to a certain amount where it's actually eliminated altogether. But as it relates to your child, you have to have a qualifying child. The child must be related to you, age 17 or under, a US citizen, have a valid Social Security number, and you must provide at least half of their financial support. Let me go back just one: I said, you have to be a citizen, but it can also be a national or resident alien. But if you meet those qualifications, you may qualify for those monthly payments and the child tax credit itself.

Now there is an option for qualifying parties to opt out of receiving the payments, right? How would that work? What would someone who doesn't want to receive the payment have to do?

[Washington] You can opt out. So, if you're someone who's listening and you might say that, "Okay, well, I like the idea of receiving the monthly payments, but I may owe taxes next year, so I liked the fact that the credit reduces my taxes.” You may just want to opt out. That might be one of the options, and you can do that by heading over to the irs.gov website. You can click on the child tax credit update portal, and then you can actually unenroll altogether.

If you're going to do that, you want to do it as soon as possible. There are deadlines for each month. You definitely could head over to irs.gov and have some good articles that I've actually written with Forbes Advisor that explain those different deadlines, but you do need to opt out by a certain time. If you are a person who's married, both of you and also your spouse must go unenroll. If you do not want to receive the payments, you both would need to unenroll.

Is this a credit that taxpayers would have to repay?

[Washington] It's really going to depend on your situation. Keep in mind, just like I stated earlier, that the IRS is using, in most cases, your 2019 or 2020 tax return that's on file. However, if you have some changes because we're already in 2021, and maybe you don't have a qualifying child anymore, whatever the case may be, there is a chance, I see a chance that you may have to repay the credit, but it really is going to depend on your situation.

Understanding this, the IRS has implemented what's called a Full Repayment Protection Program. This is just a safeguard for some taxpayers who may fall in this category. What the IRS is saying here is that, hey, while you may not qualify anymore, this is like a “get out of jail free pass” per se. If your income is under a certain amount, even though you may not qualify, and even though you did receive the payments, in that case, you will not have to pay it back, but your income has to be less than $60,000. If you are joint $50,000, if you have a household then $40,000, if you are single underneath that amount. If you do exceed these amounts and you say, “Do I need to repay this credit back?” it's going to really depend because, after a certain amount, it's going to be a partial repayment that you will have to pay it back in full up to a certain amount. You do want to find out more information and talk to tax professionals concerning this.

What tools and resources are there out there and available to taxpayers that would help them not only understand their eligibility, but how much they may receive, whether they should opt out? Is there stuff out there that they can be taking a look at to understand this better?

[Washington] There's a lot of different tools. We have a great tool at Forbes Advisor, a great calculator. We've been into the developing team, working with this calculator to make sure it's really good and ready to go. I've also helped the tech team to develop this calculator, but it's a really good tool where you can put in your information, determine exactly how much you can expect to receive for your child tax Credit payments.

There's a lot of articles that I've written, one, a very good one, "If You Miss on a Child Tax Credit Payment, What Must You Do?" There's another article, "Do You Need to Repay the Child Tax Credit Payment?" Then, last but not least, "Why You Might Want to Opt Out," where I really explain more information where you can determine and make a good decision.

But you also want to look at the irs.gov website. They put together a good portal with a lot of good online tools that can really help you through this process. But there's a lot of information out there that could assist you during this time.

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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.