The 2021 Advance Child Tax Credit
Should You Opt Out?
The Child Tax Credit got a major overhaul as part of the American Rescue Plan Act of 2021. The new credit expands on the existing credit of $2,000 to provide families a total of up to $3,000 for each child ages six to 17 and up to $3,600 for each child under six. The expanded child tax credit is fully refundable, and instead of receiving the credit upon filing taxes, families will receive half of the credit in the form of advance monthly payments. The other half is to be claimed when filing your 2021 income tax return.
Qualifications
The amount a family receives is based on income. To qualify for the expanded tax payments, families must earn an adjusted gross income that does not exceed $150,000 if married and filing jointly or $75,000 for individuals. Families earning a combined adjusted gross income of more than $400,000 will see their credits incrementally reduced to less than $2,000 per child. Visit the IRS website to see if you qualify for advance Child Tax Credit payments.
Potential Benefits
Since the credit is fully refundable, that could mean more cash in parents’ pockets. This credit is also available to non-filers, which will be particularly impactful for the lowest-income families. As long as you accept the credit with the understanding you may have to pay the money back eventually, it could be a good decision for your family. You could look at it as essentially an interest-free loan.
Potential Drawbacks
Qualification is based on a family's 2021 taxes, but advance payments are delivered using 2020 or 2019 tax information that may no longer reflect a family's situation. And unlike the stimulus payments, the advance child tax credit payments may have to be repaid.
There have been three rounds of federal stimulus aid since the start of the pandemic. The government issued checks that weren’t taxable and weren’t advanced payments of their refund – they were just extra money. Those who do not fully understand this new credit may be in for a surprise at tax time. It is important to know that what you’re getting is a prepayment of what you would get anyway when you file your return.
Enrollment
The IRS will use the information you provide on its website to determine if you qualify and automatically enroll you for advance payments. You do not need to take any additional action to get advance payments. Use this tool to check if you’re enrolled to receive payments, unenroll to stop getting advanced payments, and provide or update your bank account information.
Opting-Out
To avoid repaying the credit later, some families are opting out of the advance payments. This may be the best choice if a family's income has changed this year, a child is aging out of eligibility, or parents are divorced and claiming children as dependents in alternating years.
To opt-out, you must make this request through the IRS Child Tax Credit Update Portal. Make sure to log in and review the existing information in the portal, which can also be used to check if you’re enrolled to receive advance payments and provide updated bank information for future payments.
As of now, the expanded child tax credit is slated to be a one-year modification for 2021 only, but the Biden Administration has proposed extending the credit into the coming years. All parents should familiarize themselves with the changes to the tax credit, weigh the potential benefits and disadvantages, and make a decision based on what they feel is best for their family.
Resources:
- Check if you’re eligible – Use this eligibility assistant to see if you qualify for advance payments.
- Manage payments – Use this tool to check if you’re enrolled to receive payments, unenroll to stop getting advanced payments, and provide or update your bank account information for monthly payments.
- Submit your information as a non-filer – If you aren’t required to file a tax return and haven’t provided the IRS with your information already, you will need to provide some basic information for the Child Tax Credit.