It is important to first understand what a tax credit is. In general a tax credit is a dollar-for-dollar reduction of the amount of income tax that you owe. As an example, if you owed $500 in income tax on your federal tax return and had a $500 tax credit, you would now owe $0 in federal income tax.

Tax credits can be non-refundable or refundable. Non-refundable tax credits will reduce tax you owe but there’s no benefit to you after the tax owed reaches $0. So if you owed $500 in tax but had a $600 non-refundable tax credit, you would not owe $0 in federal income tax. Refundable credits, however, can be paid to you as a refund if the credit is more than the tax you owe. So if you owed $500 in tax but had a $600 refundable tax credit, you would receive a refund of $100.

The child tax credit is meant to assist taxpayers in paying for necessary expenses for their children. Prior to 2021, the Child Tax Credit was a partially refundable tax credit:  taxpayers could qualify for up to $2,000 per child (under 17) with a refundable amount up to $1,400 per child. This credit was calculated when filing the 2020 tax return.

The American Rescue Plan (ARP) increased the Child Tax Credit for 2021: taxpayers could receive up to $3,600 per child under age 6 at the end of 2021, or up to $3,000 per child from age 6 through 17 at the end of 2021. The amount that each taxpayer will receive is based on the taxpayer’s adjusted gross income (MAGI) for the whole of 2021. Further, the ARP allowed for an advance payment of half of your estimated child tax credit.  The Advanced Child Tax Credit (ACTC) is calculated based on your processed 2020 tax return (or 2019 tax return if your 2020 one had not been processed yet). For each qualifying child, you would receive $250 ($300 if 5 or younger) for each month during the July -December 2021 time period. For example, if you have 2 children aged 6 and 8, you would receive $500 each month for the last 6 months of 2021, or a total of $3,000. 

When it comes time to file your 2021 tax return, the amount of ACTC payments that you received will be compared to the amount of the Child Tax Credit that you’re eligible to claim (as that’s based on your total 2021 income). If you have excess credit, it will reduce the amount of your tax owed.  However, if you received more in advanced payments than you were eligible to, you can expect to repay* the excess amounts you received (as additional tax owed with your 2021 tax refund).

Taxpayers who have received payments but wish to stop further payments for the remaining months of 2021, taxpayers needing to update their bank account and/or mailing address, and taxpayers wanting to view information about their payments can create an account and login to the Child Tax Credit Update Portal on IRS.gov.

Taxpayers that are unsure if they should receive or stop the ACTC payments should reach out to their tax advisor (or contact us if they do not have a tax advisor).

Each taxpayer that received ACTC payments will receive a Letter 6419 from the IRS in January of 2022, showing the total ACTC payments received in 2021. This letter will be needed for filing your 2021 tax return.