Taxpayers with qualifying, dependent children, will be eligible to receive advance child tax credit payments starting in mid-July 2021. Under the temporarily expanded child tax credit program, families will automatically receive the payments by mail or direct deposit if information is on file, unless they’ve previously opted out. While it seems as though receiving an advance payment could only be of benefit, there are some reasons why you may want to decline. Understanding both some of the history of the child tax credit and some of the recent changes to it can help you make a determination about whether or not it makes sense for you to opt out before your payment has a chance to be processed.
Recent Changes to the Child Tax Credit
Established in 1997, the child tax credit reduces the amount of taxes you owe on a dollar-for-dollar basis. The credit isn’t designed to work like some other tax credits which are limited by the amount of your tax liability. This credit is different in that it is refundable so that even taxpayers who have no Federal tax liability can take advantage of it. Until recently, the refundable amount of the child tax credit has been limited to $1,400.
The biggest change is that for 2021, only, the American Rescue Plan Act (ARPA) significantly increases the credit from $2,000 to $3,000 for each child aged 6-17. The increase is even more significant for taxpayers with children under the age of six who receive a $3,600 credit for each child. The ARPA also alters rules around refunds by now making the child tax credit fully refundable. Additionally, instead of being required to wait until 2022, taxpayers can take half of the benefit in 2021.
There are limits to eligibility, however. When income exceeds $400,000 for joint filers and $200,000 for other filers, the $2,000 child tax credit is subject to a phaseout. A separate phaseout of $75,000 for single filers, $112,500 for heads of households, and $150,000 for joint filers applies to the increased credit amount.
Qualifying and Receiving Advance Child Tax Credit Payments
Under the ARPA and beginning in July 2021, the U.S. Treasury Department will start making monthly advance child tax credit payments of half of the total credit, with the remaining half to be claimed in 2022 on 2021 tax returns. For example, a household that’s eligible for a $3,600 child tax credit will receive $1,800 ($300 in six monthly payments) in 2021 and would claim the balance of $1,800 on their 2021 return. Advance child tax credit payments will occur on the 15th of each month through December 2021 (with the exception of August, which will be paid on the 13th).
In order for single or joint filers to qualify for advance payments, you must have:
- Filed a 2019 or 2020 tax return that claims the child tax credit or have provided the IRS with information in 2020 to claim a stimulus payment;
- A primary home located in the U.S. for more than half of the year or file a joint return with a spouse who has a U.S. home for more than half of the year;
- A qualifying child (with a valid Social Security number) who is still under the age of 18 at the end of 2021; and
- Earned less than the applicable income limit.
Advance payments will be dispersed as direct deposits for those taxpayers for whom the IRS has bank information.
An important caveat to be mindful of is that you could potentially receive excess advance payments over the amount you qualify for in 2021. This can occur as the IRS bases your payments on your 2020 tax return (or, if not yet available, on your 2019 return). It’s not only a change in expected income that could lead to excess payments, it’s also a change in the number of dependents you plan to claim. For child tax credit purposes, divorced couples with joint custody can alternate the years in which they claim their children as dependents. If 2021 is your ex-spouse’s year to take the claim, consider opting out (your former spouse won’t receive the advance payments based on his or her 2020 tax return but, if eligible, can claim the credit on the 2021 return). Parents of children who will turn 18 in 2021 should also consider opting out.
If you do, in fact, receive excess payments, you will be required to repay the overage. The IRS will flag this by either deducting the excess advance child tax credit payment amount from your 2021 refund or by adding it to the amount of tax you owe.
Why You Might Choose to Opt Out
While it might seem like a win-win to receive advance child tax credit payments, there are several reasons you may wish to opt out of automatic enrollment through the IRS’ online portal at irs.gov. You might consider opting out if you:
- Were near the income limits in 2019 or 2020;
- Expect to earn more in 2021; or
- Want to avoid excess payments;
For those couples who are filing jointly, you must both opt out via the IRS portal to ensure you don’t receive any advance payment, as the IRS will still generate an automatic payment for half of the joint payment for a spouse who failed to opt out.
While the deadline to opt out of the first payment was June 28, 2021, you can still opt out for future payments.
Although advance child tax credit payments are currently only available for 2021, there is ongoing discussion about extending the provision through 2025. We will keep you updated should further changes occur. If you have questions on whether or not claiming the advance payments is right for your situation, contact your Untracht Early advisor.