The IRS recently made important changes to the Child Tax Credit which will enable many families to receive advance payments of the credit starting July 2021. Here is what you need to know about the 2021 Child Tax Credit and its impact on your mobility program.
2021 Child Tax Credit
Taxpayers may have already begun receiving advance monthly payments from the IRS as advance payments started July 15, 2021. If you qualify to receive the advance monthly payments and have not received one yet, not to worry as they are likely on their way or will be shortly. Advance payments will be sent to those individuals who qualify as part of the expanded 2021 Child Tax Credit under the American Rescue Plan. For tax year 2021 only, the following expanded provisions apply:
- The law provides for payment of half the total estimated credit amount in advance monthly payments.
- If the IRS has processed either the 2019 or 2020 US federal income tax returns, advance payments will be made from July 15 through December 2021, based on the taxpayer’s Modified Adjusted Gross Income (MAGI) for the applicable tax year.
- Eligible taxpayers will claim the other half of their credit through their 2021 US federal income tax return filing.
- The Child Tax Credit increased to $3,000 per qualifying child ages 6 to 17, and to $3,600 for those under the age of 6.
From an eligibility perspective, it is important to note the following:
- Certain income limitations apply. Different from prior years, the advance payments will be included on the 2021 US federal income tax return and may need to be paid back if MAGI for 2021 exceeds established thresholds.
- Only qualifying children who are age 17 or under at the end of 2021 and who have a valid Social Security number can qualify for the expanded credit and advance payments.
- A new requirement holds that the taxpayer(s) must have a main home in the US for more than half the year (2021) to qualify for the credit.
Taxpayers can elect to unenroll from the advance Child Tax Credit payments. There are certain situations where taxpayers may want to opt out of the advance payments. For example, if a taxpayer’s 2021 income (MAGI) will likely exceed the thresholds to qualify for the expanded credit, they may want to opt out of receiving the advance monthly payments to avoid needing to pay back any excess payments on their 2021 US federal income tax return. Alternatively, a taxpayer may prefer to receive the full amount of the Child Tax Credit when they file their 2021 US federal income tax return in 2022.
It is important to note that taxpayers filing jointly will need to opt out individually. They can opt out using the IRS’s Child Tax Credit Update Portal here: https://www.irs.gov/credits-deductions/child-tax-credit-update-portal
For more information, the IRS explains the expanded Child Tax Credit and advance payments in detail here: https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021
Potential Impact on Mobility Programs
The expanded credit and advance monthly payments may complicate a mobile employee’s 2021 income tax matters and potentially increase costs and administrative burden for mobility programs. It will be important for mobility program managers to proactively create and communicate their policies on addressing this impact.
Since the credit is based on MAGI, employees who have received taxable benefits from their organizations in 2019, 2020, or 2021 could see an impact as to their eligibility for the expanded credit and advance payments.
It is common for expatriates on tax equalized assignments to receive allowances or taxable reimbursements relating to housing, cost of living, and/or tax payments/gross-ups. These additional add-ons to their Form W-2 could result in the employee not qualifying for the expanded credit and advance monthly payments. Unlike the economic recovery rebate and other stimulus payments issued by the US government in 2020 and 2021, those US citizens and green card holders residing outside of the US and claiming the foreign earned income and/or housing exclusions may not qualify for the advance payment based on their MAGI (as the amount of the exclusions are added back to adjusted gross income to determine MAGI).
Policy questions to address and communicate to your mobility populations include:
- Will your organization issue advance payments based on stay-at-home income levels now, factor the reduced or eliminated portion of the Child Tax Credit into the employee’s 2021 tax equalization calculation, or decide that an employee will only receive a credit if available from the IRS?
- Will you agree to revisit gross-up calculations for other non-equalized mobile employees within your organization who may have been eligible for company-paid benefits and/or tax gross-ups (e.g., permanent transfers, business travelers)?
As noted in the second point, the potential policy impact is not limited to traditional mobility arrangements. The same impact could apply to any category of mobile employee in your organization. For example, your organization may provide reimbursement for taxable moving expenses that are provided to permanent transfers. Some organizations will provide tax reimbursement for business travelers with multi-state tax burdens. Employees with this additional taxable compensation could see reductions or elimination of the expanded credit and advance monthly payments due to the inflated levels of income.
Even if your policy will provide for a true-up of the Child Tax Credit based on a final tax equalization calculation, some employees may feel disadvantaged from a cash flow perspective if they do not qualify for advance payments based on 2019 or 2020 income levels that were impacted by company-paid benefits. “Hypothetical” tax advances could be considered but would add administrative complexity and could lead to future collection issues if the additional payments increased tax equalization settlements due back to the company. Careful documentation and review would also be required in determining the timing of income inclusion for these advance payments for Form W-2 reporting and withholding.
Given the additional administration and potential complications with tax equalization settlements, it may be easier for mobility programs to instruct their mobile employees to opt out of the advance monthly payments. As this decision would have cash flow implications and could impact employee satisfaction, it will be important to have feedback from key mobility program stakeholders, including human resources/talent management and your corporate legal team.
Finally, depending on the number of employees, it may be prudent for mobility programs to work with their organization’s tax and finance team to make sure appropriate accruals are calculated to avoid unexpected organizational costs.
Once policy decisions are made, it will also be critical for companies to maintain consistent lines of communication with impacted employees, so they understand the approach taken and timing of any payment or reconciliation.
If you have questions about how this may impact your employees or mobility program, we are here to help. Schedule a call with our team to discuss your specific situation.