Why is my Monthly Child Tax Credit payments lower than expected?

Why is my Monthly Child Tax Credit payments lower than expected?

On July 15, 2021, the first batch of advance Monthly Child Tax Credit payments worth about $15 billion were delivered to about 35 million households across the country. Subsequent payments will continue each month as follows:

  1. Aug. 13,
  2. Sept. 15,
  3. Oct. 15,
  4. Nov. 15
  5. Dec. 15.

These payments are a little different from the Child Tax Credits claimed in previous years. Previously, parents could claim a credit of $2,000 for qualified children aged 16 or younger. However, the new American Rescue Plan has temporarily raised the amount (and age bracket) to:

  • $3,600 for each qualifying child age 0–5
  • $3,000 for each qualifying child age 6–17

Many families who have received their first payment are wondering why their deposits or checks are lower than they had expected

To help clarify this, let’s take a look at how these monthly Child Tax Credit payments are calculated…

The Income Phaseout Rule…

Most American families will qualify for the full Child Tax Credit, but not everyone will. If your modified adjusted gross income (“MAGI”) is higher than a certain amount, the credit you can claim will be reduced through two (2) phaseouts.

  1. First Income Phaseout

    The first phaseout step can reduce only the $1,600 increase for qualifying children who will be ages 5 and under at the end of 2021, and the $1,000 increase for qualifying children who will be ages 6 through 17 at the end of 2021.

    If your MAGI is more than:

    • $150,000 when filing jointly as a married couple or surviving spouse.
    • $112,500 when filing as head-of-household.
    • $75,000 when filing in any other capacity.

    …then that additional credit amount is reduced by $50 for every $1,000 you earn over the limit.

    I know, it sounds complicated. Let’s break it down a bit.

    For example, let’s say Mark and Amy have two children, Peter and Anna. Peter is 5 years old, and Anna is 7. Together, Mark and Amy have a MAGI of $ 202,000. and file jointly as a married couple. Because their MAGI exceed the $150,000 limit for their category by $52,000, their additional credit amount will be reduced by $2,600. ($52 x $50.)

    Instead of receiving additional $2,600 (Anna – $1,600, Peter – $1,000), they get nothing ($2,600 Less $2,600 Phaseout Amount).

    For Mark and Amy, their additional credit amount is phased out completely due to their income threshold.

  2. Second Income Phaseout

    If your modified adjusted gross income (MAGI) is more than:

    • $400,000 when filing jointly as a married couple or surviving spouse.
    • $200,000 when filing under any other status.

    …then the standard $2,000 of your tax credit for each child will be reduced by $50 for every $1,000 you earn over that limit.

    Let’s go back to Mark and Amy. Since their MAGI doesn’t exceed $400,000, they qualify for the full $2,000 tax credit for each of their two children, adding up to a total of $4,000—all of which is fully refundable.

    So, for Peter (age 5) and Anna (age 7) they will receive:

    • the additional Child Tax Credit of $0.00 (see calculation on First Income Phaseout above)
    • the standard child tax credit of $4,000 ($2,000 * 2)

    Altogether, Mark and Amy will receive $4,000 ($4,000 standard credit Plus $0.00 additional credit) from the 2021 Child Tax Credit.

    Once the credit amount is determined, 50% of it will be paid in advance in the form of monthly payments over 6 months.

    For Mark and Amy…

    • the IRS will pay an advance of up to 50%, which will be $2000. ($4,000 x 50%.)
    • This means they will receive advance monthly payments of $333.00. ($2,000 ÷ by 6 months.)
    • They will then claim the rest of the 50% on their 2021 income tax return during the 2022 tax filing season.
  3. Some Further Details on the Child Tax Credit Payments…

  4. Here’s Who Will Receive the Monthly Advanced Child Tax Credit Payments

    Payments are automatic and will be delivered on a monthly basis to eligible families who:

    • Filed 2019- or 2020-income tax returns
    • Do not typically file a return, but during 2020 successfully registered for Economic Impact Payments using the IRS Non-Filers tool
    • Do not typically file a return, but during 2021 successfully registered for Advance CTC using the IRS Non-Filers tool
  5. CAUTION: The monthly Child Tax Credit payments may affect your refund or taxes owed!

    As the saying goes, you cannot eat your cake and have it, too.

    The monthly Child Tax Credit payments are early payments from the IRS of 50 percent of the estimated amount of the Child Tax Credit that you may properly claim on your 2021 tax return during the 2022 tax filing season.

    Taking it early may reduce your refund or increase the amount of tax you owe when you file your 2021 tax return during the 2022 tax filing season.

    Therefore, if you’d rather wait and receive the full credit as a refund in 2022 or expect to owe taxes, you can opt out of the advance payment program.

  6. Be on the lookout for scammers and Identity thieves

    The IRS urges everyone to be on the lookout for scam artists trying to use advance Child Tax Credit payments as a cover for schemes to steal personal information and money.

    The IRS does not initiate contact by email, text messages, or social media channels to request personal or financial information – even information related to advance Child Tax Credit payments.

    Also, watch out for emails with attachments or links claiming to have special information about advance Child Tax Credit payments or refunds of the Child Tax Credit.

    If you receive a suspicious IRS-related email, see Report Phishing and Online Scams for additional information.

  7. What to do if you have not received your Monthly Child Tax Credit payments

    If you have not received payment, first step of the process is to check payment status by logging into the IRS Child Tax Credit Update Portal.

    You can request a payment trace to track your payment if you have not received it within the timeframes below. IRS will not be able to trace your payment unless it has been:

    • 5 days since the deposit date and the bank says it has not received the payment.
    • 4 weeks since the payment was mailed by check to a standard address.
    • 6 weeks since the payment was mailed, and you have a forwarding address on file with the local post office.
    • 9 weeks since the payment was mailed, and you have a foreign address.

    To start a payment trace:

  8. Direct Deposit is by far the best payment option

    If you would like to have your payment direct deposited, many financial institutions will help you open a low-cost or no-cost bank account.

    Visit the Federal Deposit Insurance Corporation website for details on opening an account online or use the FDIC’s BankFind tool to locate an FDIC-insured bank.

    If you’re a veteran, see the Veterans Benefits Banking Program for financial services at participating banks.

    Finally, BankOn, American Bankers Association, Independent Community Bankers of America, National Credit Union Administration have lists of banks and credit unions that can open an account online.

  9. Don’t Miss Out on Your 2021 Child Tax Credit

    If you didn’t file a 2019 or 2020 income tax return because you do not make enough income to have an income tax return-filing obligation, or did not use the “Non-Filers: Enter Payment Info Here ” tool to get your Economic Impact Payment, just use this tool to give the IRS the information they need.

    And if you:

    • Want to forego the advance payments and receive a lump sum payment when you file your 2021 tax return.
    • Need to change information about your marital status, income, or number of children.
    • Have just had a baby in 2021.
    • Are not sure if you qualify for the child tax credit…

    …You may use these two new online tools to manage your Child Tax Credit payments. You should be able to (1) determine your eligibility, and (2) adjust your information and preferences as necessary.

    For more information, visit Advance Child Tax Credit Payments in 2021.

***Disclaimer: I am a tax accountant and a CPA licensed in Massachusetts , but I am not your accountant or advocate (Unless you have signed up to my services). This communication is not intended as tax advice, and no tax accountant -client relationship results**

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