IRS Memo Clarifies Some Additional Child Tax Credit Issues

In an internal memo, the IRS has clarified some issues regarding the additional Child Tax Credit.

Additional Child Tax Credit

Generally, the additional Child Tax Credit (CTC) is the refundable portion of the CTC. To claim the additional CTC, a taxpayer must have at least $2,500 in taxable income and one qualifying child. The CTC is usually limited to $2,000 per qualifying child and the additional CTC is usually limited to $1,400.

However, for 2021, the American Rescue Plan Act temporarily increased the CTC to $3,000 ($3,600 for qualifying children under age 6) and made the credit 100% refundable.

Also, for 2021, eligible taxpayers can receive an additional CTC even if they have no taxable income.

IRS Clarifies Issues

The IRS' memo clarifies the following issues regarding the additional CTC:

1. Certain individuals are entitled to the additional CTC if they get less than the full amount of the CTC. The additional CTC may result in a refund even if no tax is owed.
2. To be a qualifying child for the CTC, the taxpayer must claim the child as a dependent and the child's taxpayer identification number (TIN) must be reported on the taxpayer's tax return.
3. There are special rules for taxpayers claiming a religious (e.g., Amish/Mennonite) or conscience-based objection to obtaining a TIN for themselves and their children.
4. For tax years after 2015, taxpayers who file Form 2555, Foreign Earned Income, cannot claim the additional CTC.
5. If a bona fide resident of Puerto Rico has U.S. government wages, they cannot exclude those wages under Code Sec. 933, which applies to income derived from sources within Puerto Rico. Such taxpayers must file Form 1040 or Form 1040-SR, and use Schedule 8812, Additional Child Tax Credit, to claim the additional CTC.
6. For 2018 and 2019, taxpayers affected by a disaster may elect to use their prior year earned income when calculating the additional CTC. Generally, to use prior year earned income (PYEI), the taxpayer's main home must have been in a Presidentially Declared Disaster that occurred in 2018 or 2019.
7. For 2020, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 allows taxpayers to figure their additional CTC using their 2019 earned income if it is more than their 2020 earned income. Taxpayers should enter PYEI and the dollar amount of their 2019 earned income on the dotted line for additional CTC. Taxpayers electing to use PYEI when figuring their 2020 additional CTC and who also claim the Earned Income Tax Credit (EITC) may also elect to use PYEI when figuring their 2020 EITC, but they are not required to do so.

Interim IRM Procedural Update