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.

Child Related Tax Benefits For Reducing Your Tax Burden

Being a parent can have its benefits. This is especially so during tax time. No, your kids will probably not help you sort through your tax receipts, but you can certainly claim some child-related tax benefits when you file your federal tax returns.

Some of these benefits include:

  • Claiming the Child as a Dependent: Parents can deduct $4,050 (2016/2017) for each qualified dependent. However, if your income is over a specific limit, the amount that you can deduct will decrease.
  • Child Tax Credit: For each qualifying child below the age of 17 years, you can claim the Child Tax Credit. The maximum credit you can claim is $1,000 per child. Individuals in lower income tax brackets might qualify for the Additional Child Tax Credit (ACTC).
  • Child and Dependent Care Credit: To claim this credit, you must have paid for the care of one of more qualifying people. Paying for care must have enabled you to work or to look for work. The list of qualifying people also includes dependent children below 13 years of age.
  • Adoption Credit: If you paid certain expenses for adopting a child, you could claim a tax credit for the amount paid. Form 8839, Qualified Adoption Expenses provides more details on this.
  • Education Tax Credits: The tax authorities provide education tax credits to reduce your tax liability. These credits are comprised of the American Opportunity Tax Credit and the Lifetime Learning Credit. Even parents who owe no tax can qualify for claiming these credits. In some cases, these credits are phased out (high income earners) or have reduced the amount of tax owed to less than zero. The latter situation invariably results in a refund.
  • Student Loan Interest: Parents might be able to deduct the interest paid on a qualified student loan. They can claim this even if they do not itemize the deductions. Use this Interactive Tax Assistant for determining if the interest you paid on a student or educational loan is deductible.
  • Self-Employed Health Insurance Deduction: The authorities permit taxpayers to deduct the premiums paid during the year. Self-employed taxpayers who paid for health insurance can avail this deduction.
  • Earned Income Tax Credit (EITC): You could get a credit of as much as $6,269 in EITC (2016) if you worked but earned less than $53,505 last year. In addition, you could qualify with or without kids. Refer to the EITC Assistant tool for more information.

If you have any further questions, feel free to contact me at paul@launchconsultinginc.com