American Rescue Plan Act: Child Tax Credit Advance – Know What it Means
Guest blog by Kim Ruef, CPA
The American Rescue Plan Act includes a provision to get funds into the hands of America’s parents beginning as early as this summer. The bill also increases the credit from $2,000 to $3,000 for children ages 6 – 17 and $3,600 for children under 6.
The result is that families (subject to income limitations) can receive up to half of this credit by the end of the year. Remember, that these payments are an ADVANCE of the 2021 credit. Presumably, if you end up not qualifying due to an increase in income, these advance payments will need to be repaid.
Additionally, if you count on the $2,000 credit to cover your annual tax liability you may find yourself a little short come next April.
In the case of divorce, if you receive the credit due to claiming the children in 2020 and then your spouse gets to claim them in 2021 you may find yourself short!
Scenario 1
If you claimed two children between 6 and 17 on your 2020 return you can expect an advance of about $3,000 beginning in July. When you file your 2021 return, you would be eligible for $0 child tax credit if your spouse is claiming the children. Presumably, this shortage would have to be repaid.
Scenario 2
Conversely, if your spouse claims the children in 2020 and you get them in 2021 you can count on a bigger credit on your 2021 return even if you don’t begin receiving the advances this summer.
If one spouse has significantly higher income ($95,000 if they file individually, and $170,000 if they have remarried), it may be worth exploring whether they will release the claim to the children by filing Form 8332 – Release/Revocation of Claim to Exemption for Child by Custodial Parent. This would allow the lower earning spouse to receive these higher credits next April even if they don’t receive the advance payments this summer.
The key to navigating this legislation, like with any legislation, is to understand how you will be affected not only in the short term (this summer), but also in the long term (next April).
Kim@trueconsultingllc.net - (608) 478-1131 - www.truesolutions.business
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