Navigating the Advance Child Tax Credit Reconciliation Process

by Prof. Robert Bloink and Prof. William H. Byrnes

Many clients with children have now received six months’ worth of advance child tax credit payments for the 2021 tax year. Those payments have ended for 2022—but with the 2021 tax filing season upon us, it’s now time for clients to evaluate the payments they’ve received to determine whether the taxpayer was actually entitled to those advance payments. For many, that process is proving to be more complex than anticipated—and some clients could find themselves on the hook for repaying erroneous advance payments. The IRS has now provided detailed guidance on the reconciliation process—and, because the IRS has been updating its frequently asked questions on a rolling basis, it’s important to pay close attention to the details to help clients get it right.

Advance Child Tax Credits: The Basics

Typically, clients would have waited until they filed their federal income tax returns in April 2022 to claim the child tax credit based on their qualifying children and 2021 income levels. For 2021, the IRS used the taxpayer’s 2020 information (or, if not available, 2019 information) to determine whether the client was entitled to receive advance payments for the 2021 tax year. Clients were able to update this information for changes via the online child tax credit portal on the irs.gov website.

For 2021, taxpayers with qualifying children were eligible to receive a child tax credit equal to (1) $3,600 for children aged five and under and/or (2) $3,000 for children between ages five and 17 (as of year-end).

For 2022, the child tax credit returns to a $2,000 lump sum payment for children aged 16 and younger. The 2022 credit will again be claimed on the client’s tax return in April 2023 (unless Congress acts to retroactively change the law).

Taxpayers with modified adjusted gross income (MAGI) that falls under $75,000 (single filers), $112,500 (heads of household) or $150,000 (joint filers) are eligible for the entire tax credit in 2021. For taxpayers with income that exceeds these levels, but that is less than $200,000 (single filers) or $400,000 (joint returns), the credit phased out by $50 for each $1,000 by which income exceeds the initial threshold (but not below $2,000 per child).

Taxpayers with MAGI that exceeds $200,000 (single filers) or $400,000 (joint returns) are subject to a second phaseout that could reduce the tax credit to $0.

The IRS Reconciliation Process

Most of the time, a client will only have to repay a portion of the advance child tax credit if (1) their income increased significantly in 2021 or (2) the child no longer lived with the parent for at least six months of the year (or if a co-parent was eligible for the child tax credit for 2021).

To begin the reconciliation process, the client should total the payments received during 2021. The IRS has also mailed Letter 6419 with information about payments made during 2021 (each parent will receive a letter if the parents filed a joint return—and both letters will be necessary to accurately reconcile payments).

Next, the client should calculate the amount of child tax credit that should have been received based on the income thresholds discussed above. If the client received too much, they may qualify for full or partial repayment protection.

The client will not be required to repay any excess payments if the client’s income falls below $40,000 (single returns) or $60,000 (joint returns). The client will qualify for partial repayment protection if their income falls below $120,000 (joint returns) or $80,000 (single returns).

Potential Pitfalls: IRS Acknowledges Errors in Letter 6419

To complicate matters further, the IRS has updated its fact sheet to note that amounts listed in the child tax credit portal or on Letter 6419 may not match. The IRS indicates that the issue isn’t expected to be widespread, but could happen if (1) the letter was printed or mailed in December 2021 and (2) an advance payment was returned by either the bank or U.S. post office.

Taxpayers who received advance child tax credits should compare amounts listed in Letter 6419 to the amounts listed in their IRS online account. If the amounts are different, the client should use the amount listed in the IRS online account.

Clients should also note that the “online account” is different than the “child tax credit portal”—and that it may be necessary to establish an online account if the taxpayer hasn’t already done so.

The IRS hasn’t offered much in the way of helpful guidance for clients who rely upon an incorrect payment amount—even if that amount is provided by the IRS itself. These returns will likely be evaluated manually by the IRS, meaning that refunds could be delayed.

Conclusion

The IRS has repeatedly updated its FAQs and Fact Sheets to provide new guidance—yet has created some additional complications in the process. It’s important to pay close attention to emerging guidance to help clients get it right when it comes time to reconcile 2021 advance child tax credits.