By: Kristie Adams CPA - Senior Tax Manager
Were you one of the tens of millions of American families to receive the first monthly installment of the 2021 Enhanced Child Tax Credit? Are you just as confused as the rest of the country as to what it is or what to do? Don’t worry; you are not alone. The questions and uncertainty have left many taxpayers feeling confused.
For tax year 2021, eligible families will receive a credit up to $3,600 for children 5 and younger and up to $3,000 for children 6 to 17. This was passed as part of the American Rescue Plan Act, enacted in March 2021. The changes made to the Child Tax Credit as part of this act are temporary and only apply to the 2021 tax year unless additional changes are made to extend or make it permanent. There is a phase out of the enhanced credit starting for Single or Married Filling Separate taxpayers making over $75,000 ($150,000 Married Filing Joint or $112,500 Head of Household). NOTE: If your income does not qualify you for the increased credit, you may still qualify for the normal Child Tax Credit of $2,000.
One half of this enhanced credit (50%) was made to be payable in six monthly installments starting July 15, 2021. Taxpayers could receive up to $300 each month per child, depending on the age of the child and the modified adjusted gross income of the taxpayer.
Now the real question is: is this a good idea for you?
For many working Americans this should not be a big deal. If their incomes are consistent from the prior year and claim the same number of qualifying dependents, then there may be no need to worry. If you use your tax refunds each year as a way of a “forced savings plan”, just know that it could be lower this coming year because of the advanced Child Tax payments received in 2021.
However, you may be one of those Americans that fall under one of these special circumstances.
The advanced Child Tax Credit payments could be problematic for Self-Employed Individuals who use their Child Tax Credit to offset their required estimated tax payments. They may find that when they file their 2021 tax return that they still have a balance due plus penalties for underpayment of estimated tax.
Single, divorced or separated individuals who share custody of their children may find themselves receiving the advanced payments but when they file their 2021 tax return it could be the other parent’s turn to claim the child, leaving them with the possibly of having to repay the amount advanced.
High-income taxpayers may also want to consider opting out of receiving the advanced Child Tax Credit. Since the advanced payments are based on the prior year’s information, households reporting higher incomes in 2021 may be eligible for a smaller amount of the credit or none at all. You may have taken out a distribution from a retirement account or some other type of taxable income that you did not have in the prior year.
Will I have to Pay it Back?
When it comes time to file your 2021 tax return, you will need to reconcile the amount you are eligible for and the amount you were advanced.
You are married and file a joint return with your spouse and have one child aged 5. Your total joint income is below $150,000. You would qualify for maximum Child Tax Credit of $3,600 when you file your 2021 tax return. If you received $1,800 in advanced payments in 2021 ($300 each month, July- Dec 2021) you would not owe any of the credit back and still receive the other one half of the credit ($1,800) when you file your 2021 tax return. Just remember, in this situation, your refund with your tax return would likely be less than what you historically have received because you would have received this credit in advance.
If you had opted out of receiving the advanced payments, you would receive the total amount of the Child Tax Credit $3,600, when you file your 2021 tax return.
Now, let’s say your joint income is $200,000.
Your Child Tax Credit is now limited to $2,000. If you had received $1,800 in advanced payments, your credit when you file your 2021 tax return is now only $200. This could result in a lesser refund than you are used to or could also mean that you now owe tax on your tax return.
If you filed your 2020 tax return with one qualifying child but in 2021 you have ZERO qualifying children, and you were paid $1,800 in advanced payments. When you file your 2021 tax return you would be required to repay the $1,800 advanced payments as additional income tax UNLESS you fall under what the IRS is calling “repayment protection”.
Full repayment protection is available if your 2021 Modified Adjusted Gross Income is at or below:
• $60,000 Married Filing Jointly
• $50,000 Head of Household
• $40,000 Single
Can I still elect out of receiving the advances, how do I opt out?
Opting out by August 30, 2021 will ensure you will not receive the installments to be paid on September 15, 2021 through the end of the year. To unenroll, you will need to go to the IRS website (irs.gov) and create an ID.me account. To do this you will need to have a photo ID (such as a driver’s license or passport) and a phone or computer with a camera. You will be required to prove you are you, by scanning your ID and then providing a “selfie”. There have been reports of people receiving error codes while trying to set up their accounts. This could be caused by a recent move, answered security questions incorrectly, or you may have your credit locked or frozen. If you do not already have an online account set up with the IRS, there are currently no other options that will allow you to opt out. Calling the IRS is not an option at this time.
NOTE: If you are married and file a joint return, you and your spouse will have to opt out. If one spouse opts out and the other does not, the spouse that does not will continue to receive half of the monthly advance.
Let us help you.
In January 2022, the IRS says it will be sending out a notice to families that received Child Tax Advanced payments. You will need this when filing your 2021 tax return. This will determine the amount of your actual Child Tax Credit for 2021.
Each taxpayer’s situation will be unique. We are here to help you in deciding what is best for you and your needs. Planning ahead will help to maximize your financial situation and position you for greater success. Please reach out to one of our team members with any questions you may have.