Options Available for Your 2021 Child Tax Credit

Should You Opt Out?

As part of the American Rescue Plan Act (ARPA) that was enacted in March 2021, the child tax credit has changed for tax year 2021 only. The advance payments are intended to ease the financial burdens of families still struggling with the economic fallout from the COVID-19 pandemic.

Changes to the Child Tax Credit for 2021

The IRS will begin paying out half of the eligible credit as advanced monthly payments starting July 15. These payments will be up to $300 per month.  Taxpayers will then claim the other half when they file their 2021 income tax return. Unlike the prior Covid related stimulus payments from 2020, these payments will have to be repaid if you receive too much during the year.

Other changes to the tax credit include:

• Amount increased from $2,000 to $3,000 (up to $3,600 for children under 6)
• Is fully refundable (meaning you can receive it even if you don’t owe the IRS)
• raised the age of qualifying children to 17 from 16
• eligible for AGI of $75,000 or less for singles and $150,000 or less for married filers

What are your options?

Each year, a taxpayer’s financial situation can vary, and this year is not any different. Some families may prefer to wait until the end of the year and receive the entire credit as a refund when they file their 2021 tax return.   Others, for example, may not qualify.

1. Opt out. Opting out before July 1 will allow the taxpayer to claim the full amount of the child tax credit on the 2021 tax return. Should you opt out? It may be important if your 2021 income will be too high to quality for the credit, someone else qualifies to claim your dependent(s) in 2021, or you are used to getting a refund on your tax return. (Note: If you filed a married filing joint return in 2020, both you and your spouse will need to opt out)
2. Receive the payments BUT save the money. Unlike the stimulus payments, these advance payments may need to be paid back depending on the outcome of your 2021 tax return. If 2021 income significantly increased above the child tax credit threshold and the advance credit exceeds the actual credit, the taxpayer will repay the excess on their 2021 return.

IRS’s child tax credit update portal

Using the IRS’s child tax credit and update portal, taxpayers can currently opt out of receiving the advance payments. Additional features will be coming to the portal soon which will allow you to check the status of payments, update banking information, change family status and change in income.  Additionally, the IRS will provide taxpayers a written notice no later than Jan. 31, 2022 that includes the total amount of the payments received. You will need this notice when you complete your 2021 tax return. Still have questions? Check out the IRS frequently asked questions section updated frequently.

Deadlines to Opt-Out of Monthly Child Tax Credit Payments

You will continue to get the scheduled payments until the IRS processes a request from you to unenroll from the monthly payment process. If you opt-out of the monthly payments now, you will not be able to re-enroll until late September. Also, if you’re married and file a joint tax return, your spouse will also need to opt out since the unenrollment process only applies on an individual basis. If your spouse does not unenroll from the monthly child tax credit payments, you will continue to get half of the joint payment you would otherwise receive with your spouse.

Though these changes only apply to the 2021 tax year, they may present important financial planning opportunities today. The credit is normally part of your income tax return and would reduce your tax liability. The choice to have the child tax credit advanced will affect your refund or amount due when you file your return. If you have questions, please reach out to your AdamsBrown advisor to discuss your options.