Advance Child Tax Credit and EIP Must Be Reconciled on Your 2021 Return

In 2021, Congress passed the American Rescue Plan, which included a provision that increased the child tax credit amount and upped the age limit of eligible children. Typically, the credit was $2,000 per eligible child under age 17. For the 2021 tax year, the American Rescue Plan increased the credit to $3,000 per child under age 18 and $3,600 for children under age 6.

Even though the benefit of a tax credit isn't typically available until after the tax return has been filed, this new tax law included a provision to get the credit benefit into the hands of taxpayers as quickly as possible and charged the Secretary of the Treasury with establishing an advance payment plan. Under this mandate, those qualifying for the credit would receive monthly payments starting in July equal to 1⁄12 of the amount the IRS estimated the taxpayer would be entitled to by using the information on the 2020 return. If the 2020 return had not been filed or processed yet by the IRS, the 2019 information was used.

However, since the IRS only estimated the amount of the advance payments, some taxpayers may have received too much and others not enough. Thus, The taxpayer must reconcile the payments received on the 2021 tax return with the amount each taxpayer is entitled to. Those who received too much may be required to repay a portion of the advance credit, while others may be allowed an additional amount.

To provide taxpayers with the information needed to reconcile the payments, the IRS has begun sending out Letter 6419, an end-of-year statement that outlines the amounts received and the number of qualifying children used by the IRS to determine the advance payments. For those who filed jointly on their prior-year return, each spouse will receive a Letter 6419 showing the advance amount received.

Do not discard the letter(s) from the IRS, as they will be required to file 2021 returns properly.

Having received the advance credit payment, taxpayers will find their refunds will be substantially less than they may have expected, or they might even end up owing money on their tax return unless their AGI is low enough to qualify for the safe harbor repayment protection for lower-income taxpayers, in which case the excess advance repayment is eliminated or reduced.

Example: If a taxpayer received tax credit payments for two children based on the 2020 return, and the taxpayer didn't claim both children as dependents in 2021, the taxpayer would need to repay the excess on their return unless the safe harbor provision protects them.

A taxpayer could also have received the advance child tax credit payments based on their 2020 return and not have to repay under the safe harbor rule. Meanwhile, another taxpayer can legitimately claim the child and get the credit on their 2021 tax return. This is most likely to happen when the parents are divorced. So, there's the potential for the child tax credit to be received by both parents.

Economic Impact Payment (EIP) Letter - The IRS will begin issuing Letter 6475, regarding the third Economic Impact Payment, to EIP recipients in late January. This letter will help EIP recipients determine if they are entitled to and should claim the Recovery Rebate Credit on their tax year 2021 tax returns filed in 2022.

Letter 6475 only applies to the third round of Economic Impact Payments issued starting in March 2021 and continued through December 2021. The third round of EIPs, including the "plus-up" payments, were advance payments of the 2021 Recovery Rebate Credit that would be claimed on a 2021 tax return. These were additional payments the IRS sent to those who received a third EIP based on a 2019 tax return, information obtained from the Social Security Administration, Railroad Retirement Board, and Dept. of Veterans Affairs, or to people who may be eligible for a more significant amount based on their 2020 tax return.

Most eligible people have already received the payments. However, those missing stimulus payments should review the information to determine their eligibility and whether they need to claim a Recovery Rebate Credit for the tax year 2020 or 2021.

Like the advance CTC letter, the EIP letter includes essential information that can help tax preparers quickly and accurately reconcile the Recovery Rebate Credit when preparing 2021 tax returns.

Don't hesitate to contact this office if you have questions regarding the Child Tax Credit or the Recovery Rebate Credit and the advance payments of either that you received.