Puerto Rican families can now claim the full Child Tax Credit even if they have only one child and no taxable income. Here’s how to claim the credit.

Since it was established in 1997, the Child Tax Credit (CTC) has been gradually increased in size and made more refundable to U.S. families with children. However, the majority of individuals residing in Puerto Rico, an “unincorporated territorial possession” of the U.S., have not had access to the CTC, as only families with three or more qualifying children were eligible. Until the American Rescue Plan, passed in March of 2021, which extends the availability of the CTC to all families in Puerto Rico with children as of tax year 2021.

The American Rescue plan also increased the credit: from $2,000 per qualifying child to $3,600 for children ages 5 and under at the end of 2021, and $3,000 for children ages 6 through 17 at the end of 2021. The CTC is also now fully refundable, meaning that for tax year 2021, bona fide residents of Puerto Rico can claim the full credit amount, even if they had no income and paid no U.S. Social Security taxes. This is especially noteworthy, as Puerto Rico’s families didn’t receive monthly advance payments for the CTC in 2021. As such, those filing will receive the entire expanded credit in a lump sum.

On May 6, 2022, the IRS released guidance for claiming the credit for residents of Puerto Rico in IR-2022-105. Whether or not they have an existing 2021 federal tax filing requirement, they must file one of four federal 1040 tax forms: Form 1040-PR, Form 1040-SS, Form 1040, or Form 1040-SR. Any one of the forms can be used to claim the CTC, even after the April 18, 2022 filing deadline. Qualifying residents of Puerto Rico who do not owe taxes to the IRS can still file a 1040 return and claim the CTC without penalty until April 15, 2025.

For residents who have children but do not have a federal tax filing requirement for the 2021 tax year, the IRS issued Revenue Procedure 2022-22, which simplifies the filing process for residents of Puerto Rico:

• For Form 1040-PR and Form 1040-SS: Follow the instructions except for the requirement to report modified adjusted gross income on line 1 of Part I.
• For Form 1040 and Form 1040-SR: Follow the form instructions except for the requirement to report modified adjusted gross income on lines 1 through 3 of Schedule 8812, “Credits for Qualifying Children and Other Dependents.”

Resident families of Puerto Rico can use the simplified methods if:

Schedule LEP for Form 1040, “Request for Change in Language Preference,” may also be filed with the return to request a change in language preference for any further communications from the IRS.

For more information, reach out to your HBK Tax advisor for more information at 239-482-5522, or email Calvin at cle@hbkcpa.com.

The American Rescue Plan Act of 2021 modifies a number of tax provisions, including modifications to the child tax credit. For 2021, the maximum child credit is increased to $3,000 for qualifying children up to age 18 ($3,600 for qualifying children under age six), the credit is fully refundable for most taxpayers, one-half of the credit may be distributed in regular payments during the last half of the year, and the credit is also expanded to Puerto Rico and American Samoa.

The IRS and the Treasury have announced that the first monthly payment of the new refundable Child Tax Credit (“CTC”) from the American Rescue Plan will be made on July 15. Further, the increased CTC payments will be made on the 15th of each month unless the 15th falls on a weekend or holiday. Eligible families will receive a payment of up to $300 per month for each child under age 6 and up to $250 per month for each child age 6 and above. Notably, the American Rescue Plan had increased the maximum CTC in 2021 to $3,600 for children under the age of 6 and to $3,000 per child for children between ages 6 and 17. Typically this credit has been claimed as a lump sum on the parents’ annual tax returns, lowering their overall tax bill or creating a refund, for the 2021 year however these payments will be made in advance.

Eligibility

The eligibility of a taxpayer to receive the benefit of these payments will be based on either the 2019 or 2020 tax return information, depending on what has been most recently filed by the Taxpayer. The enhanced credit, for the entire year, is worth up to $3,000 per child aged 6 to 17 and $3,600 for children under age 6. That’s an increase from $2,000 per child under age 17. The maximum amount is available to individuals making $75,000 or less and married couples making $150,000 or less, with a phaseout for incomes above those thresholds.

An individual may claim a child tax credit (CTC) for each qualifying child. A qualifying child generally:

1. must be the taxpayer’s child (including a stepchild, adopted child, or foster child) or sibling (brother, sister, stepbrother, or stepsister), or a descendant of the taxpayer’s child or sibling;


2. must be under age 17 at the end of the tax year;


3. must be a U.S. citizen, national, or resident;


4. must live with the taxpayer for more than half of the year;


5. cannot provide over half of his or her own support for the year;


6. cannot file a joint return for the year other than to claim a refund; and


7. must be claimed as the taxpayer’s dependent.

It is important however to note that while the IRS is basing eligibility for these payments on 2019 and 2020 data, the credit itself is based on 2021 information. This means that individuals may receive the credit based on their older tax information and have to repay the advance credit on their 2021 tax year return if they were not eligible under the income threshold limitations, or if the dependent claimed in the prior returns no longer qualifies.

To help combat this the IRS has released a tool that allows taxpayers to opt-out of the advanced CTC payments. This Portal can be used to double-check current 2021 year eligibility, view any advanced payments that you may be entitled to receive and their payment schedules, update the number of qualified dependents, and opt-out from these advanced payments. Taxpayers who choose to opt-out of advanced payments but who retain eligibility will still be permitted to take the CTC on their 2021 return as a lump sum as they have done in prior years. Taxpayers who wish to opt-out of these advanced payments should do so prior to the July 15 date that the IRS is projected to start sending the first round of payments out.

In the case of a taxpayer who received advance payments in error (for example, where a 2019 or 2020 return indicated a dependent child who is no longer a dependent in 2021), the American Rescue Plan provides a “hold-harmless” provision, protecting taxpayers from having to pay back overpayments of up to $2,000 per child. The full $2,000 amount is ratably reduced for taxpayers with income above a threshold amount ($40,000 for single filers, $50,000 for head of household filers, and $60,000 for joint filers). The $2,000 is completely eliminated for taxpayers with income double the applicable threshold amounts, and the entirety of the overpayment must be paid back.

If there are any questions on these provisions please reach out to your HBK Tax Advisor to discuss eligibility and whether opting out is beneficial for you.

The passage of the Tax Cuts and Jobs Act (TCJA) resulted in a complete makeover of the forms used to prepare individual income tax returns. Apparently “filing on a post card” is possible; for some, the new Individual Income Tax Return will indeed be as simple and straightforward as filling out a two-sided post card-sized form. For many others, however, the new form will be accompanied by one or more of six new schedules.

The first page of the new form is informational. It lists the taxpayer’s filing status, name, address, social security number and dependents. It also includes a signature area for the taxpayers and the tax preparer.

The second page of the new form contains the information used to compute the tax due for the year; it has been significantly simplified from prior year forms. If additional information needs to be reported, the TCJA has provided the following schedules to be used:

• Schedule 1 should be included in any tax return where the taxpayer receives income from capital gains (reported on Schedule D), ordinary gains (reported on Form 4797), business income (reported on Schedule C), rental and pass through income (reported on Schedule E), or any other type of income typically referred to as “Other Income.” This form will also report any adjustments to income, such as the deductible part of self-employment tax (reported on Schedule SE), the self-employed health insurance deduction, the deduction for contributions to an IRA and the student loan interest deduction.
• Schedule 2 will be included in any tax return where the taxpayer is subject to the Alternative Minimum Tax (reported on Form 6251) or needs to make an excess advance premium tax credit repayment.
• Schedule 3 will be used to claim nonrefundable credits such as the foreign tax credit (reported on Form 1116), any residential energy credits, general business credits or child and dependent care expenses.
• Schedule 4 will be used to compute other taxes such as self-employment taxes (reported on Form SE), additional taxes on IRAs, net investment income taxes (reported on Form 8960), household employment taxes (reported on Schedule H) and any Section 965 taxes due.
• Schedule 5 will be used to report any estimated tax payments as well as any payments made with an extension. This schedule will also be used to claim any refundable credits that the taxpayer is entitled to other than the earned income credit, such as the American opportunity credit or the additional child tax credit.
• Schedule 6 should be included for any taxpayers who have a foreign address or wish to designate a third- party designee to discuss their return with the IRS.

In addition to these new schedules, taxpayers should be prepared to fill out many of the standard, familiar forms and schedules when completing 2018 returns.

Taxes can be complex, and it is important to understand how these changes might affect filings. The examples included in this article are not all-inclusive and not intended as a substitute for the value and knowledge of consulting with a tax specialist. Please contact a member of the HBK Tax Advisory Group with your questions and concerns. We’re here to help.