2021 Changes in Child Tax Credit Can Complicate 2021 Tax Returns

Major changes in the 2021 child tax credit may complicate 2021 tax returns. Filers must deal with substantive changes to the credit, as well as substantially revamped tax forms and instructions.

In substantive terms:

• The maximum amount of the 2021 child credit was increased from $2,000 to $3,000 for children under age 18, or $3,600 for children under age six.
• Most taxpayers received advance payments of a portion of the credit during 2021.
• The credit is fully refundable if the taxpayer’s main home during 2021 was in the United States, or the taxpayer was a bone fide resident of Puerto Rico for 2021.

Because of these changes to the credit, all worksheets for figuring the 2021 child credit have been moved from the Form 1040 instructions, and are now included in the instructions for a substantially revamped Schedule 8812. The IRS also did not update Publication 972, Child Tax Credit and Credit for Other Dependents, for the 2021 tax year.

New Schedule 8812, Credits for Qualifying Children and Other Dependents

In past years, Schedule 8812 was used only to calculate the refundable portion of the child credit, known as the Additional Child Tax Credit (ACTC). However, since the 2021 credit is fully refundable for taxpayers who lived in the United States or Puerto Rico, Schedule 8812 was renamed and rewritten so that everyone must use it to calculate the 2021 child credit.

Schedule 8812 and its instructions calculate the credit for taxpayers in several different situations.

Schedule 8812 Credit Calculations

Taxpayers who lived in the United States or Puerto Rico during 2021 must calculate the credit amount by:

1. applying an adjusted gross income (AGI) phase-out that reduces only the $1,000/$1,600 increase in the amount of the 2021 credit,
2. applying a separate AGI phase-out that reduces the $2,000 original credit amount, and
3. deducting advance credit payments they received during 2021.

If the result is a positive number, that is the amount of the fully refundable child credit the taxpayer may claim on Form 1040.

Of course, like other refundable credits, the 2021 child credit is applied first to reduce federal income tax liability. It may also be offset against amounts the taxpayer owes for federal debts, state debts, and child support. 

Taxpayers who did not live in the U.S. or Puerto Rico must also calculate the credit after applying the separate AGI phase-outs and deducting their advance credit payments. However, their credits are not fully refundable. Thus, they must also use the traditional ACTC rules to calculate their refundable credits.

Taxpayer Might Have to Recapture Advance Child Credit Payments

As in pre-2021 years, the AGI phase-outs and ACTC calculations cannot not reduce a child credit below zero. However, the 2021 advance payments may cause the credit calculation to result in a negative number.

Advance credit payments may reduce the 2021 child credit to less than zero if the taxpayer had more qualifying children in 2020 than in 2021. In addition, the credit phase-outs might cause a negative credit amount if the taxpayer’s filing status changes, or the taxpayer’s AGI is significantly higher in 2021.

Schedule 8812 Recapture Calculations

The last section of the new Schedule 8812 calculates any repayment obligation when a child credit calculated on the 2021 return is less than the advance credit payments the taxpayer received. However, this is not a simple matter of figuring the difference between the two amounts, because the repayment obligation may be reduced by yet another set of AGI phase-outs.

If the AGI phase-outs reduce the repayment obligation to zero or less, the taxpayer cannot claim any additional credit, but the taxpayer does not have to repay any of the excess advance credit payments. However, any repayment obligation that remains after the application of the AGI phase-outs is added to the taxpayer’s income tax liability as an additional tax.

Special Procedures for Nonfilers to Claim Child Credit on 2021 Returns

As mentioned above, the credit is fully refundable for individual whose main home in 2021 was in the U.S. or Puerto Rico, even if they have little or no income. However, these individuals must file 2021 returns to claim credit.

So another big change for the 2021 child credit involves individuals who are eligible for the credit, but do not normally file tax returns because their income is below the filing threshold. These individuals may use simplified return procedures to file both electronic and paper returns – though of course, the IRS encourages everyone to file electronically.

These simple returns may also entitle the individual to the 2021 Recovery Rebate Credit. Individual who have any earned income should be sure to include it on a simplified return, because they might also be entitled to the earned income credit and/or a refund of federal income tax withholding. 

Conclusion

The changes to the 2021 child credit certainly make preparing 2021 returns more challenging. Still, the extra effort will be worth it for most taxpayers.