The 2021 Child Tax Credit: What’s changing — and will your advanced payment cause additional tax burden?

By Daniel R. Steinmeyer, MBA, CPA | June 30, 2021

This year’s changes to the federal child tax credit (CTC) are significant and a seeming advantage for parents, but upon a closer look, they may not be a benefit for all taxpayers.

Historically, qualified taxpayers received their child tax credit when they filed their income taxes. But beginning July 15, 2021, and recurring monthly through December 15, the IRS will either directly deposit a portion of each qualified taxpayer’s advanced credit into their bank accounts or send payments through the mail. Half of the credit will be distributed in this manner, and the remaining portion will be claimed when taxpayers file their 2021 income tax return.

You do not need to do anything to qualify for the credit if you are current on your income tax filings. The IRS will use the information from your 2019 or 2020 tax return — whichever was most recently processed by the IRS.

In addition, the credit now includes several taxpayer-friendly adjustments:

  • Children who turn 17 this year qualify for the credit.
  • There is an additional $600 annual credit for children under the age of 6 years old.
  • The credit is now refundable.

Regarding the advance payments, however, there are restrictions that could make receiving them less desirable, and some taxpayers may want to opt out of the program. Among the restrictions:

  • To receive the full $3,600 credit, the taxpayer’s adjusted gross income cannot exceed certain limits. A taxpayer will only receive the maximum enhanced credit if their adjusted gross income is $75,000 a year or less for a single filer, $112,500 or less for a head-of-household filer, and $150,000 dollars or less for joint filers.
  • Unlike the recent direct payments made under the CARES Act, overpaid CTC payments must be repaid.
  • Receiving the advanced payments will reduce the amount of credit available on your 2021 tax return.

Careful planning and consideration should be given before deciding on whether to take the advanced payment of your 2021 CTC. If you know that your income will exceed the above thresholds or you simply do not wish to have the credits paid in advance so that you can preserve the deduction for your tax liability, you may want to consider opting out of the advanced payments.

The IRS has set up a Child Tax Credit Update Portal, an online tool that will allow taxpayers who do not want to receive the advance payment to opt out. This service is now available on the IRS website, and with the first advanced payments coming soon, taxpayers must make a decision.

Your tax advisors at McClintock and Associates are ready to assist with any questions you may have. If you would like more information, please contact one of our tax experts here.

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