The IRS announced it is automatically paying half the estimated amount of Child Tax Credit that individuals may claim on their 2021 tax returns in advance monthly payments, as of July 15, 2021. The other half will be captured in their 2021 tax returns and reconciled on the 2021 tax return filed during the 2022 tax filing season. This change could impact any U.S. employee who have children under 18 years old on or before Dec. 31, 2021.
For internationally mobile employees and their employers, the payments could lead to complexities in the forthcoming 2021 tax season. The advance payments may result in balances due to the IRS or amounts payable to an employer under a tax equalization policy.
Accordingly, some taxpayers should consider either updating their information or opting out and unenrolling from receiving advance Child Tax Credit payments. This can be completed at the IRS Child Tax Credit Update Portal (CTC UP). The opt-out portal is available at https://www.irs.gov/credits-deductions/child-tax-credit-update-portal.
Below are the tax consequences that this benefit may present for inbound assignees, tax equalized assignees as well as general employees who have filled out their W-4 Forms before the recent law:
- Tax-equalized assignees inbound to the US: For assignees to the United States from foreign-based companies where U.S. taxes are paid on behalf of the employee, the benefit of the Child Tax Credit may benefit the company in reducing the tax cost that is due and paid on behalf of an employee. It is recommended that individuals who have received communications stating they will receive advance payments opt out as soon as possible. If they do not, any amounts received may be due back to the company.
- Tax-equalized outbound assignees: Some assignees may not qualify either fully or partially for the Child Tax Credit benefit due to the income they receive, potentially as a result of the assignment-related income or other taxable benefits paid on their behalf. They may be eligible for this credit under a company’s tax equalization policy if their hypothetical tax liability is lower when calculated.
- Form W-4 ramifications: Employees who have already accounted for the Child Tax Credit in their Form W-4, may owe federal taxes upon receipt of the advanced monthly Child Tax Credit benefit. The employees have been paying federal taxes reduced by the Child Tax Credit on their paychecks and will also receive half of the benefit automatically by the IRS. As a result, they will be taking advantage of the credit twice and may owe federal taxes on their 2021 tax returns.
2021 IRS Child Tax Credit - additional details
The American Rescue Plan Act of 2021 will increase the Child Tax Credit for U.S. citizens, green card holders, and U.S. tax resident aliens who in 2021 earned less than certain income limits11, had a main home in the United States for more than half the year2 and had a qualified child under 18 years old with a valid Social Security number3.
As with any other tax credit, the child tax credit decreases taxpayers’ tax liability on a dollar-for-dollar basis. The recent legislation has raised the credit from $2,000 per child (under age 17) in 2020 to $3,000 per child (under age 18) or $3,600 per child (under age 6) in 2021. Additionally, while the credit was partially refundable for 2020, it is fully refundable for 2021. Qualified individuals who do not owe any federal income tax for any reason (including those claiming the foreign tax credit and/or the foreign earned income exclusion) will receive the Child Tax Credit.
The IRS will pay half of the estimated amount of the Child Tax Credit that individuals may claim on their 2021 tax returns in advance monthly payments as of July 15, 20214. The other half will be provided after the 2021 tax returns are filed. The payments will be reconciled to the amount of Child Tax Credit due on the 2021 tax return during the 2022 tax filing season. Additional Child Tax Credit funds may be available with the 2021 tax return; however, if greater than eligible amounts are received, taxpayers may have to repay the excess on the 2021 tax return.
The IRS will calculate the amounts based on their 2020 or 2019 federal tax returns and make either bank deposits or send checks automatically, as follows:
- Age 6 and younger: $3,600 annually ($300 per month)
- Ages 6 to 17: $3,000 annually ($250 per month).
1 The new maximum Child Tax Credit is available to taxpayers with modified adjusted gross income (AGI) of: $75,000 or less for singles; $112,500 or less for heads of household, and $150,000 or less for married couples filing a joint return and qualified widows and widowers. The credit phases out completely to taxpayers with modified adjusted gross income (AGI) of $200,000 and $400,000 for married individuals.
2 US individuals on temporary international assignments are considered to have a main home in the US while residing abroad.
3 IRS Publication 972, page 3. The IRS has raised the age for the qualifying child from under 17 to under 18 years old by the end of the year.
4 The dates for the Advance Child Tax Credit payments are July 15, Aug. 13, Sept. 15, Oct. 15, Nov. 15 and Dec. 15
Richard is a Principal in our New York Human Capital Services practice and leads the Global Mobility Services practice in the United States.
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