Advance Child Tax Credit Payments: 2021 Info You NEED to Know!
If you have a child 17 years old or younger, you may soon be
seeing a payment from the IRS! In fact, you
may be seeing a payment from the IRS every 15th of the month from
July through December 2021. These are not more of your typical economic
impact payments (aka “stimulus checks”). They are actually advanced payments of
the Child Tax Credit…a credit you usually receive when you file your tax
return.
WHAT
EXACTLY ARE THESE PAYMENTS, AND HOW MUCH WILL THEY BE?
The “advance Child Tax Credit payments” are early payments
of the Child Tax Credit you usually would have on your tax return. The payments
will be paid once per month from July 15th – December 15th
and will equal ½ of the estimated total you would receive on your 2021 tax
return for that credit.
For 2021 only, the Child Tax Credit has been increased to $3,600 for each qualifying child 5 years old or younger,
and $3,000 for each qualifying child between 6 years
old to 17 years old. (For reference, for 2020 the Child Tax Credit was a
maximum of $2,000 for each qualifying child under 17 years old.)
EXAMPLE: If you have one qualifying child that is 3 years
old and you otherwise qualify for the Child Tax Credit, you would receive $300
per month for each month from July to December, for a total of $1,800 (i.e. ½ of
the $3,600 you are eligible for). The remaining $1,800 you would have as a
normal tax credit when filing your 2021 tax return.
WHO
QUALIFIES FOR THESE PAYMENTS?
To qualify for the advance Child Tax Credit:
1) You must have a qualifying child
a.
Under 18 years old as of January 1, 2022
b.
Your son, daughter, stepchild, eligible foster
child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or descendant
of one (i.e. a niece, nephew, or grandchild)
c.
Does not provide more than one-half of their own
support in 2021
d.
Lives with you for more than one-half of 2021
(in general….there are some exceptions we won’t get into)
e.
Is properly claimed as your dependent
f.
Doesn’t file a joint return with their spouse
g.
Is a U.S. citizen, national, or resident alien
and has a valid SSN
2)
You must have your main home in the U.S. for
more than half the year
3)
Your modified adjusted gross income must be
within the limits
a.
Full credit: modified AGI of…
i.
under $150,000 if married filing jointly or
filing as a qualifying widow/widowers
ii.
under $112,500 if filing as head of household
iii.
under $75,000 if filing as single or married
filing separately
b.
Phased out credit down to $2,000 per child: reduced
by $50 per $1,000 over the above
c.
Reduced credit of less than $2,000 per child: $50
reduction for each $1,000 over the applicable threshold when modified AGI…
i.
exceeds $400,000 for married filing joint
ii.
exceeds $200,000 for all other filing statuses
d.
No credit: when modified AGI…
i.
exceeds $440,000 for married filing joint
ii.
exceeds $240,000 for all other filing statuses
HOW DO
I RECEIVE THE PAYMENTS?
If the IRS has determined you qualify based on your 2020 tax
return (or 2019 tax return if 2020 hasn’t been filed), you are automatically
enrolled in the advance payments.
If you have not filed your 2019 or 2020 tax return, you will
want to do that as soon as possible (and use e-filing, not a paper filing) to
be auto enrolled. If you aren’t required to file a tax return, the IRS has a
non-filer tool here.
If you have a new child in 2021, you will need to update
that information on the new IRS Child Tax Credit Update Portal here.
Functionality on this portal is being rolled out, so this feature may not yet
currently be available.
The IRS will use your banking information (if available) to
direct deposit each payment. If they do not have that information, the payments
will be sent via mail.
WHEN
DO THEY START?
The first payment is set to go out on July 15. Below is a
schedule that shows each expected payment date per the IRS.
WHY WOULD
I WANT TO OPT OUT OF RECEIVING THE PAYMENTS?
Put simply, you may want to opt out of receiving these payments
to avoid an unpleasant tax surprise when you file
your 2021 tax return. Essentially, instead of receiving a larger refund or
smaller tax bill come next year’s filing, you would be receiving that money now
via these advance payments. Or if the IRS is issuing your payment based on outdated
information, then you may have to essentially pay the advance payments back on
your 2021 tax filing (i.e. you receive payments you weren’t actually eligible
for). If you opt out of the advance payments, you are only opting out of receiving
what you are allowed “early” (in 2021); you will still receive the full credit
you should get when you file your 2021 tax return.
EXAMPLE #1:
Your 2021 tax liability on your 2021 tax return is $5,000.
You had $2,000 withheld on your 2021 W-2. You have two qualifying children, one
7-year-old and one 3-year-old. With the advance payments, you are eligible and receive
a total of $3,300 from July to December. Whenever you file your 2021 tax
return, you would have $3,300 remaining of the 2021 child tax credit. This
makes your 2021 tax refund $300.
If instead you opted out of receiving the advance payments, you
would not receive anything from July to December. Whenever you file your 2021
tax return, you would have the full $6,600 2021 child tax credit remaining.
This makes your 2021 tax refund $3,600.
In either scenario, the total you receive is $3,600.
EXAMPLE #2:
Your 2021 tax liability on your 2021 tax return is $5,000.
You had $2,000 withheld on your 2021 W-2. You had a qualifying child that was
16 years old in 2020, but for 2021, you will no longer have a qualifying child.
However, the IRS does not know this. Therefore, they send advance payments
based on one 17-year-old qualifying child which means a total of $1,500.
Whenever you file your 2021 tax return, you would have $0 of a 2021 child tax
credit, but you already received $1,500. So now, your 2021 tax bill is $4,500.
If instead you opted out of receiving the advance payments, you
would not receive anything from July to December. Whenever you file your 2021
tax return, you would show you no longer have a qualifying child, thus $0 for
the 2021 child tax credit. So now, your 2021 tax bill is $3,000.
If your modified AGI is more than the above amounts, then the repayment protection amount will be reduced. Once your modified AGI is above $120,000 for married filing joint or qualifying widow or widower; above $100,000 for head of household; or above $80,000 as single or married filing separate; it will be $0 and you will essentially owe back the full amount of advance credit you received.
HOW DO
I OPT OUT OF RECEIVING THE PAYMENTS?
If you want to opt out of these payments, you can use a new online
tool on the IRS website here.
You must unenroll at least 3 days before the first Thursday of the next month (see
the IRS graphic below). If you miss the deadline, you will receive that month’s
advance payment and continue to do so until the IRS has processed your unenrollment
request.
IMPORTANT NOTE FOR MARRIED COUPLES: You BOTH
have to use this tool to opt out individually. If only one of you opts
out, you will still receive ½ the total monthly payment.
Remember: You are only opting out of receiving the tax
payments from July to December 2021. You will get the FULL credit you are eligible
for whenever you file your 2021 tax return.
At this time, if you choose to opt out, then you are not
able to re-enroll. The IRS may be adding this feature in September 2021.
WHERE
CAN I FIND MORE INFORMATION?
A great resource to learn more can be found on the IRS
website here.
There are Topics A – K that identify some of the most frequently asked
questions. This blog post is meant to give you the basics, but there are complexities
and exceptions beyond this. 😊
Feel free
to reach out to us at Arndt & Company with any questions!
Thank
you!
Kayla
Weaver, CPA
Disclaimer:
This article is not intended to be tax advice, and it does not cover all
possible scenarios and/or rules within the tax code. Please contact Arndt &
Company or your CPA for further information or clarification.
