Wegmann Dazet’s Richard Tullier, CPA explains the tax implications of the 2021 advanced child tax credit payments and helps to answer “Claim it or opt out?”
In March 2021, the American Rescue Plan Act increased the child tax credit from $2,000 per child, up to as much as $3,600 per child for kids under 6. Further, the IRS was directed to pay out half of this credit to taxpayers starting July 15, 2021 in monthly installments. As your income gets above certain levels ($150,000 for married filing jointly and $112,500 for head of household), your credit gets reduced from the elevated levels back to $2,000 per child.
But as your mama always said, “Nothing in life is free.” While the advanced child tax credit is not taxable, you will receive half now of what you would get at year end. So that means if you are supposed to receive $3,600 at year end, you’ll get $300 per month for the next 6 months and claim $1,800 on your tax return. And I know you’re saying, “How can that be a bad thing?” Well it’s not, unless, for example, you count on that credit to reduce your year-end tax burden. It also could be problematic if you were eligible for the higher credit based on 2019 or 2020 taxes, but when you file for 2021, you are no longer eligible. Unlike the stimulus, you must pay the shortfall back.
For example, assume you have one child and you and your spouse received a $2,000 child tax credit and a refund of $500. That means your child tax credit reduced your tax burden and without it, you would have had to pay $1,500. For 2021, assuming all facts are the same, you would get half of that money now and would only be able to claim $1,000 on your return, so you would not get a refund and would instead owe $500.
If you choose to opt-out of the advance payments, there is a process to follow via the IRS at this link: https://www.irs.gov/credits-deductions/child-tax-credit-update-portal. Through that link you will create an account for both you and your spouse. To do so, you will need to provide a copy of your driver’s license and have access to a smartphone.
So back to the headline, Advanced child tax credit – claim it or opt out? The answer, like everything in tax, is “it depends.” If you are disciplined enough to remember that you got this advance when tax filing season comes around, do nothing and the advanced payments will come to you. If you are concerned that it will just cause a problem at year end, then you should opt out. Either way, you will get the same money.
The last day to opt out for July’s payment is June 28, 2021. If you miss that date, you will get your July payment and can still opt out of future payments.
If you now ask yourself “advanced child tax credit – claim it or opt out?” and you’re just not sure, give us a call and we can help you make this and other important decisions.