Starting July 15, 2021, the IRS will start issuing advance payments on taxpayers’ 2021 Child Tax Credit. Taxpayers do not have to do anything to start receiving these advance payments over the next 6 months. However, there is an option to opt out of the advance payments and simply receive the payments as a tax credit in full on the taxpayers’ 2021 tax return. The following is meant to be a Who/What/When/Why on the updated tax credit and the advance payments. Every taxpayer situation is, of course, different, so if you have any questions, please do not hesitate to contact our office for clarification.
The Child Tax Credit (CTC) has long been a tax credit available to taxpayers on their Form 1040 filing. The amounts have changed over the years, but in 2020, the amount was $2k/child under 17 and $500 for others. For 2021, The American Rescue Plan increases the amount of the credit to $3k/child 17 and under ($3,600 per child under 6). In addition, the American Rescue Plan provides for HALF of the eligible credit be advanced starting in July 2021. Basically, if the taxpayer is eligible for $3,000 credit, $1,500 of that credit will be paid to the taxpayer over the next 6 months in equal installments of $250. It is important to note that this is an advance payment not in addition to the credit. So, in the example above, the taxpayer would only get the remaining $1,500 as a credit on their 2021 return.
Taxpayers with Adjusted Gross Income (AGI) under $75k (single) or $150k (joint return) are eligible for the increased credit amount AND the advance payment. Above those amounts, there is a phase out after which the credits are treated the same way they were on the 2020 return filings.
As mentioned above, the advance payments will begin on or about July 15, 2021. If you are eligible and the IRS has your bank account information from prior tax filings, they will automatically deposit your advance payment each month on or about the 15th through December 2021. If you wish to update your bank information, please see the IRS link below for accessing their tool.
This is the way the bill was passed through Congress. I assume the advance payments were meant to put cash in pockets of taxpayers throughout the year rather than just at the end of the year when taxpayers file their returns (either that or Congress wanted to make filing next year more difficult for taxpayers and their preparers!).
It’s important to at least consider opting out of the advance payments. There are 2 main reasons why you might consider opting out:
- If your AGI increases materially from 2020 to 2021 it’s possible your 2021 return won’t qualify for the increased credit amount. In that case, you would be responsible for repaying any ineligible advance credit payments received.
- If you rely on the CTC to serve as a “payment” thus meeting the minimum tax payment requirements, the advance payments could throw you out of whack at year end. This potentially subjects your return to underpayment penalties and interest.
If you want to opt out or change your bank information, the IRS has an Update Portal:
As with most things IRS, the portal is clunky and not super easy to use.
The decision to opt out should be taken on a case by case basis. I don’t have a strong opinion either way. But I do want clients to realize that any advance payments will be reconciled with qualification amounts on the 2021 tax filing and may result in repayments.