Advance Child Tax Credit: Should You Opt-Out?

The American Rescue Plan Act (ARPA) included a provision that allows for the IRS to begin making advanced payments of the Child Tax Credit next month. This credit, up to $3,600 per child under the age of 6 and $3,000 per children ages 6 to 17, is typically received as a credit applied against your total tax when you file your tax return.

The Child Tax Credit advance payments, which are scheduled to be made on the 15th of each month, were established to create financial certainty for families to plan their budgets. The first monthly payment is slated to begin on July 15, unless a taxpayer opts-out

Should you opt out of advance payments?

Everyone’s individual situation is different, but many individuals rely on these credits at year-end upon filing to reduce their tax burden, especially individuals and entrepreneurs that have factored these credits into their withholding and estimated tax payments. If you want to avoid any unwanted surprises at tax time, it may be beneficial to opt out of the advance payments unless you need the funds to make ends meet. If you chose to opt out, you will still be able to claim the full Child Tax Credit upon filing of your 2021 tax return. Otherwise, any payments received in advance are not allowed to be claimed as a credit on your 2021 tax return.

Receiving these advance payments will likely complicate your tax return next filing season and result in a lower tax refund or larger balance due than usual.

If you received advances of the Child Tax Credit that you were ultimately not eligible for based on 2021 income, you may also be required to pay these amounts back. Since the advanced credit is based on 2019 or 2020 information, if you earn or receive more income in 2021 than you did in 2020 or 2019, or if your child turns 18 by January 1, 2022, you may be on the hook to repay this advance with your 2021 tax return.

How much are the Child Tax Credit payments?

Most eligible taxpayers will receive $300 per month for each child under 6 years old and $250 per month for each child aged 7-18. However, higher earners will receive reduced payment amounts.

The annual credit can be reduced to $2,000 per child if your modified AGI (adjusted gross income) in 2021 exceeds:

  • $150,000 if you’re married filing jointly
  • $112,500 if you’re filing as a head of household
  • $75,000 if you’re single or married filing separately

The annual credit can be reduced to below $2,000 per child if your modified AGI in 2021 exceeds:

  • $400,000 if you’re married filing jointly
  • $200,000 for all other filing statuses

You can opt-out of receiving this credit here.

You can check your eligibility here.

ARPA’S Enhancements to the Premium Tax Credit

The premium tax credit (PTC) is a refundable tax credit that assists individuals and families in paying for health insurance obtained through a Marketplace (Healthcare.gov) and was established under the Affordable Care Act (ACA). Recent COVID relief legislation, the 2021 American Rescue Plan Act, (or ARPA) that was just recently passed in March 2021 made several changes to this credit. Below, we’ve assembled an overview of these changes.

Changes in Eligibility for Households Above 400% of the Federal Poverty Line

Under pre-ARPA law, individuals with household income above 400% of the federal poverty line (FPL) weren’t eligible for the PTC.

Under ARPA, for 2021 and 2022, the PTC is available to taxpayers with household incomes that exceed 400% of the FPL. This change will have the effect of increasing the number of people who are eligible for the PTC.

An Increase to PTC for 2021 and 2022

New tables for 2021 and 2021 will modify how the PTC is calculated. These tables calculate the PTC on a sliding scale based on household income, expressed as a percentage of the federal poverty line (FPL). The amount of PTC a taxpayer is eligible for is limited to the excess of the premiums for the applicable benchmark plan over the taxpayer’s required share of those premiums. Previously, a taxpayer would have had to spend as much as 9.83% of their house hold income on health insurance to be eligible for the PTC. This amount decreases to 8.5% for 2021 and 2022.

No Repayment of Excess Advance PTC Payments for 2020

One of the biggest changes to the PTC was the suspension of any repayment of “excess” advances of the PTC. Even though the ARPA was passed in March 2021, this impacted many 2020 filers and is part of the reason for the delays experienced this filing season.

Historically, if your actual PTC turned out to be more than the advance payments you received as a subsidy to your health insurance premiums during the year, you would receive a refundable income tax credit for the excess. But if your advance payments exceed your PTC, you were required to pay back the excess as additional income tax, subject to a repayment cap based on your household income.

For 2020 under ARPA, if you file a 2020 return reconciling your advance PTC payments with your actual PTC, no additional income tax will be imposed if the advance payments are greater. Taxpayers can retain the benefit of the advance payments even if they exceed the maximum PTC to which they are entitled.

This is all very new guidance, but at this time, we are not recommending that clients file amended returns to claim a refund if they’ve already filed a 2020 return and paid the excess credit back as additional tax.

Please let us know if you would like more information about these new provisions.