Written by: Elissa Wurf, PhD, CPA, EA
Taxpayers with children started receiving advance payments of half of their child tax credit on July 15th as a result of the American Rescue Plan signed into law back in March.
These expanded child tax credit provisions are in effect only for 2021.
The new child tax credit provisions may have unintended consequences for some. While this move puts money in people’s pockets right away and is a boon especially for lower income families, helping some out of poverty, the advance tax payments may create an unwelcome tax surprise for wealthier families who do not manage these payments ahead of time.
Without advanced financial planning, families may end up receiving less of a refund than they anticipated or owing more tax than expected. In some cases, parents may even have to repay the government payments they receive in error. (See below).
To avoid a nasty tax surprise next April, we recommend you consult with your Agili Financial Strategist and Financial Planning Analyst to determine if you should continue to receive the advance payments or unenroll from the advance payments and instead claim them when you file your tax return next year.
Below are the basics of the tax credit in its current form.
Who Receives Advance Child Tax Credit Payments?
Families with qualifying dependents receive advance child tax credit payments. Qualifying dependents for 2021 are children 17 or under. Previously children needed to be under age 17 for their parents to receive the credit. They must also otherwise qualify for being claimed as a dependent.
What Are Child Tax Credit Payments?
In 2020, the child tax credit was a maximum of $2,000 per eligible child. Families with income over $200,000 (single) or $400,000 (married filing jointly) would start to phase out of the credit (have the credit reduced).
In 2021, the same maximum tax credit remains — i.e., up to $2,000 per eligible child for families with income over $200,000 (single) or $400,000 (married filing jointly) — but an expanded child tax credit has been added. The expanded child tax credit amount is up to $1,600 for children under age 6 and $1,000 for children ages 6 to 17.
The income limits on the expanded child tax credit are much lower, with phase outs of the credit starting with income at $75,000 (single) and $150,000 (married filing jointly).
When Are the Child Tax Credit Payments Received?
Whereas previously the child tax credit was claimed when filing income taxes, a unique provision of the American Rescue Plan is that in July through December of 2021, taxpayers by default will receive half of their anticipated child tax credit in advance via monthly payments. The other half will be received as usual when the tax return is filed, most typically in April of the following year. However, there is an option to unenroll from the advance payments and instead have the remainder of the payments received when the 2021 tax return is filed.
Why You May Want to Reconsider Receiving Advance Payments
Taxpayers, especially those who are upper middle-income or above, may want to consider stopping the advance payments. Receiving the payments in advance means that, although overall 2021 taxes for the same income will be lower than in 2020, tax refunds will be lower or balances due may be higher because half of the tax refund is being received in advance and is thus not available to lower taxes due with the return.
As the IRS says, “(B)y accepting advance child tax credit payments, the amount of your refund may be reduced or the amount of tax you owe may be increased.”
Because the IRS is basing their estimates of tax credits on your last tax return filed (2020 for most taxpayers), if your income goes up in 2021 to a point where part of your tax credit would be phased out (over $75,000 for singles and over $150,000 for married filing jointly), you could be required to pay back any additional credit you received, but, in fact, were not entitled to.
The IRS is sending payments based on the ages of children on January 1, 2021. If your child turns 18 during 2021, they may receive (but won’t qualify for) the credit — another situation that calls for payback.
Children born during 2021 will not receive advance payments but will receive a payment when the 2021 tax return is filed in 2022.
How to Unenroll from Advance Child Tax Credit Payments
Taxpayers can go to the IRS’s child tax credit portal to manage their advance payments.
Currently, you can turn off advance payments, but you cannot turn them back on. The ability to restart advance payments should be available by the end of September.
Important: Each spouse in a married couple will need to unenroll from the advance payments separately. If one spouse unenrolls but the other does not, half of the advance payments will still be received.
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