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.

The American Rescue Plan Act of 2021 – Individual Provisions

Below we have assembled a brief summary of some of the individual taxpayer provisions of the American Rescue Plan Act of 2021 (ARPA), passed on March 11, 2021.

A Third Round of Stimulus

Recovery rebate credits (stimulus checks). ARPA provides a third round of nontaxable stimulus checks directly payable to individuals. These payments are structured as refundable tax credits against 2021 taxes but will paid in 2021 and reconciled on your 2021 tax return.

This round of stimulus offer’s a maximum payment of $1,400 per eligible individual ($2,800 for married joint filers) and $1,400 for each dependent.

The income phase out limitations for this round set in quicker than previous predecessor payments. For this round of payments, the phase outs will occur between the following Adjusted Gross Income (AGI) amounts:

  • Single – $75,000 – $80,000
  • Head of Household: $112,500 – $120,000
  • Married filing joint: $150,000 – $160,000

Eligibility is based on information from 2020 income tax returns (or 2019 returns, if 2020 returns haven’t been filed when the advanced credit is initially issued). For households whose payment was based on 2019 income data, and who would be eligible to receive a larger payment based on 2020 data, no need to worry, as there is a provision that allows for the IRS to issue a supplementary payment.

Changes to the Child Tax Credit and Dependent Care Credit

Child tax credit. For 2021, the child tax credit has been increased significantly from $2,000 per qualifying child to $3,000 per child or $3,600 for children under 6 years of age.

Additionally, the IRS will begin making advanced payments of a taxpayer’s estimated 2021 tax credit during the later part of this year. These advances are expected to be 50% of the anticipated credit a taxpayer would receive on their 2021 return.

Child and dependent care credit. For 2021, the amount of expenses taken into consideration for the child and dependent care credit has been increased from $3,000 to $8,000 for taxpayers with one qualifying dependent and from $6,000 to $18,000 for taxpayers with two or more qualifying dependents. This is a massive increase to a credit that was historically insignificant to high-earners.

Dependent care assistance programs. For 2021, the amount excludible under a dependent care assistance program has been increased to $10,500 (or $7,500 for a married taxpayer filing a separate return).

Change in Taxability of Unemployment Benefits

Income exclusion for unemployment benefits. For 2020, taxpayers with modified AGI less than $150,000 can exclude from gross income $10,200 of their unemployment benefit. As of the date this was written, this limit inconveniently applies to taxpayer’s of all filing statuses, whether married filing joint, separate, head of household, or single.

We hope you find these updates useful. If you have any questions, please don’t hesitate to contact our office.