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2021 Child Tax Credit Update

January 4, 2022

By Raymond M. Roberts, Esq.

The IRS announced on December 22, 2021, that it will be sending out information letters known as “Letter 6419,” in December 2021 and January 2022, to every family that received the advance child tax credit payments in 2021.  This letter will verify how much you received in advance payments in 2021 and the number of qualifying children used to determine the payouts.  DO NOT THROW THIS LETTER AWAY! Keep this letter with your tax records for 2021 as you will need it when you file your 2021 federal income tax return.  Further, do not file your 2021 federal income tax return until you receive this letter.

Normally, the child tax credit is calculated when you file your federal income tax return, however, for 2021 only, there were changes made to the credit as part of the Covid-19 relief legislation known as the American Rescue Act which was signed into law in March 2021.  The Child Tax Credit was enhanced with a $3,600 credit ($300 per month) for every child under 6 years old and $3,000 credit ($250 per month) for every child age 6 to 17.  The tax credit for 2021 only is refundable, which means that you do not need to have income to receive it, and finally, the legislation directed the IRS to pay out half of the credit as an advance monthly installment beginning in July 2021.

So what does this mean?

First, and foremost, if you normally receive this tax credit every year, although the credit has been increased for 2021, you may find that you will have a lower refund or even a tax liability when you file your 2021 federal income tax return.  You received half of your credit in cash payments during the second half of the year.  That means that the credit that you get to claim on your return will be lower than you might expect.  Now, this will be buffered to an extent by adjustments made to 2021 income tax brackets and the standard deduction to reflect inflation.  For instance, the standard deduction for most married couples filing jointly will increase by $300 from last year, to $25,100.  For most single taxpayers and married individuals filing separately, the standard deduction rises to $12,550, or half that of married filers. Most taxpayers filing as head of household will see their standard deduction increase to $18,800.  In addition, in 2021, taxpayers may find that they have been pushed into a higher marginal tax bracket due to paycheck increases or annual raises.

Please remember that the enhanced child tax credit is for 2021, only.  In 2022, the child tax credit reverts back to $2,000 per dependent child up to age 16 through 2025, absent any new legislation on the matter.

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