Lookout for Advance Child Tax Credit Letter
There have been important changes to the Child Tax Credit that allowed families to receive advance payments in 2021.
Families with qualifying children received financial assistance during the year rather than waiting for 2022 after the tax return was filed.
Do not discard Letter 6419
The IRS began sending Letter 6419, 2021 advance Child Tax Credit, in December 2021. The letter includes the total amount of advance payments sent to the taxpayer and the number of qualifying children used to calculate the advance payments.
Keep this letter; you will need to provide it to your tax preparer to ensure your return is prepared optimally.
The advance payments were based on 2020 information about family residency, composition, and number of qualifying children. However, things change, and the actual family situation in 2021 could be different.
The credit eligibility FAQ presents an extensive list of eligibility criteria.
The first eligibility criterion: you or your spouse (if filing jointly) must have lived in the United States for more than six months during the 2021 year.
Credit received, but no longer eligible = taxable income
Importantly - if the family received the advance payments based on 2020 information, but no longer qualifies, the advance credit money will become taxable income.
- If the family qualified but the number of children was different in 2021 than it was in 2020, the amount of the credit gets recalculated. It may be increased or reduced vs the amount already received.
- If a joint couple divorced, this presents other challenges.
2021 Form 1040 contains new section for Advance Child Credit
The IRS dedicated a whole new section inside the tax return 2021 to Child Credit review and calculations. The process involves recalculation of the allowed credit amount by comparing the 2020 data to 2021 information. Completion of this section by tax preparer will require additional research and document analysis. This is an entirely new work step compared to the child credit processing in prior years.
Importantly, every family with dependent children claimed on the 2021 tax return, including families who never received the child credit before, must have the section related to the Child Tax Credit eligibility completed.
IRS sent additional letter 6475
Separate from the Advance Child Credit, many taxpayers will have received IRS Letter 6475. This letter details how much stimulus money you received in 2021, including plus-up payments. It will be sent out in late January to everyone who received the third round of stimulus checks. See article for more information.