New For 2021: Advance of Child Tax Credit
From July - December, the IRS is sending taxpayers an advance of their 2021 Child Tax Credit in the form of check or direct deposit
What changes should I be aware of?
Monthly Advance Payments
Taxpayers will receive up to half of their estimated Child Tax Credit in the form of monthly installments.
The payments are made from July - December
Taxpayers will receive up to $300 per child depending on child's age and taxpayers 2020 income level.
Children under the age of 18 as of December 31, 2021 are eligible.
The Credit Has Been Increased
Old credit amount: $2,000 per child under 17 with income of $400,000 or less (MFJ) or $200,000 or less if single.
New credit amount (Ages 0-5): $3,600, if income below $150,000 (married), $112,500 (head of household) or $75,000 (single); $2,000 credit if income below $400,000 (married) or $200,000 (HOH & single)
New credit amount (Ages 6-17): $3,000, if income below $150,000 (married), $112,500 (head of household) or $75,000 (single); $2,000 if income below $400,000 (married) or $200,000 (HOH & single).
The above graphic is for a Head of Household filer.
This Tax Credit Will Impact Your 2021 Tax Return
The decision to have the child tax credit payments received in advance will affect a taxpayer’s refund or amount due when that return is filed.
This means for those who choose to receive advance monthly payments now, they will either receive a lower refund next year or potentially owe tax (and maybe interest and penalties) that they wouldn’t ordinarily owe.
To avoid any surprises, it’s important for taxpayers to contact a CPA to discuss their situation and make any necessary plans.
Taxpayers Have The Option To Opt Out of Receiving The Advances
The IRS has created a portal in order to opt out of receiving payments:
Should Taxpayers Opt Out of Receiving the Tax Credit?
Many taxpayers remain confused about whether they should opt out of receiving advance monthly payments. Here are some of the instances where taxpayers may want to opt out:
If a taxpayer expects to owe taxes when they file their return next year, they might not want the advance payments now (as it would add to the amount they owe later).
If a taxpayer is paying estimated taxes (e.g., the taxpayer is self-employed), they likely do not want to receive advance child tax credit payments. This is because the estimated tax the taxpayer is paying the IRS and the advance child tax credit payments that the IRS is giving the taxpayer are essentially netting each other out and can result in more tax (and potentially interest and penalties) owed when the taxpayer files their return.
If taxpayers are divorced or separated and alternate claiming dependents.
If a taxpayer’s income has increased from the prior years.
IRS Updating Income, Addresses, etc.: https://www.irs.gov/credits-deductions/2021-child-tax-credit-and-advance-child-tax-credit-payments-topic-f-updating-your-child-tax-credit-information-during-2021
Pearson & Cmerek, PC is unable to to do deep tax planning on this issue until after October 15. After our fall tax deadline, we will be available to assist in optimizing your credit.
In the meantime, if you are concerned that these payments will create a tax burden, it would be prudent to save these advance payments until your tax liability becomes clear.
We will blocked off November and December for yearend tax planning.