Assume for a moment, you have a 14 year old child. Here are the two options the IRS is giving you to claim the child tax credit in 2021:
- Option A: Receive a $3,000 child tax credit when you file your 2021 tax return in 2022.
- Option B: Receive monthly payments of $250 for the next six months (totaling) $1,500 PLUS the remaining $1,500 of the child tax credit claimed when you file your 2021 tax in 2022.
By default, the IRS is enrolling families with qualifying children into Option B. You may even have received a letter from the IRS in the last couple of weeks providing an overview of the program. This is a substantial change to the child tax credit. Not only are the benefits increased for most families, but families will receive half of the child tax credit throughout the tax year.
When these advance payments are reconciled on the 2021 tax return, it may result in some families feeling like their refund is lower than in prior years, or that they owe more in taxes. This is because of the timing of when the child tax credit is received (50% paid to you monthly over 6 months and 50% paid to you on the tax return). From an overall economic perspective, most families will receive a one year boost to the child tax credit.
The rest of this blog post goes into details of how the Child Tax Credit works in 2021.
THE BIG PICTURE
The American Rescue Plan Act (ARPA) modified the Child Tax Credit for 2021.
- Under the old law, children under 17 were eligible for a $2,000 child tax credit.
- With the new law, for 2021 only, your family may be eligible for an increased child tax credit.
|If you have children between 0-5||If you have children between 6-17|
|You may be eligible for up to $3,600 in child tax credits per qualifying child in 2021||You may be eligible for up to $3,000 in child tax credits per qualifying child in 2021|
|The credit is reduced if your Adjusted Gross Income (AGI) is over $150,000 ($112,500 if Head of Household, $75,000 if Single)||The credit is reduced if your Adjusted Gross Income (AGI) is over $150,000 ($112,500 if Head of Household, $75,000 if Single)|
50% of the child tax credit will be advanced as monthly payments (unless you opt out)
Families with qualifying children will receive half of the child tax credit spread out into 6 monthly payments starting on July 15. Under the prior law, taxpayers would only claim the credit when they filed their tax returns.
|If you have children between 0-5||If you have children between 6-17|
|You may be eligible for up to $300 monthly in advance payments per qualifying child||You may be eligible for up to $250 in monthly advance payments per qualifying child|
|The credit is reduced if your Adjusted Gross Income (AGI) is over $150,000 ($112,500 if Head of Household, $75,000 if Single)|
50% of the child tax credit will still be claimed at the time of filing (for taxpayers who received advance monthly payments)
For those who receive advance payments of the credit, the remaining 50% of the credit for which you are eligible will be claimed on the 2021 tax return.
Why might this feel like my refund is smaller, or like I owe more in taxes when I file my 2021 tax return? Assume again that you have a 14 year old child. Under the old law, you would receive a $2,000 child tax credit at the time you file your taxes. Under the new law, you will receive a total credit of $3,000. Remember however that 50% of the 3,000 credit will be paid in advance. So when filing your 2021 tax return, you will only claim an additional $1,500 tax credit. In prior years you may have become accustomed to receiving a full $2,000 credit with your tax return, but are now receiving $1,500 before the tax return is filed, and $1,500 at the time the return is filed.
WHAT SHOULD YOU DO ABOUT THE CHANGE TO THE CHILD TAX CREDIT?
- Keep the IRS Letter: The IRS mailed letters to 36 million families outlining the changes to the child tax credit. The letter also provides an estimate of the anticipated monthly payment. The estimate is based on the Adjusted Gross Income of your 2020 return, or the 2019 return if 2020 has not yet been filed. BakerStarrett recommends you keep this letter with your tax documents.
- Track the advance payments: Reconciliation of the child tax credit will happen when BakerStarrett prepares your 2021 tax return in the spring of 2022. We will need to know how much you received in advance payments to correctly calculate the remaining portion of the credit you are eligible for. While we anticipate that the IRS will provide you with a report in January 2022 of the advance payments they made, it is a good idea to confirm that you actually received the payments.
- Update information on the Child Tax Credit Portal here (https://www.irs.gov/credits-deductions/child-tax-credit-update-portal) The IRS has an online portal that allows taxpayers to update information relevant to the advance payments, such as bank accounts, changes to income, and changes to the number of qualifying children. Note that some of the features of the portal are still being added and are not available as of June 23rd. Outlined below are a couple of examples where you could use the portal (not all functions are available yet)
- Children born in 2021: *This feature of the Child Tax Credit Update Portal will be added later this Summer* The portal allows families to add new children born in 2021 so they can receive the advance payments. Remember that this is not a requirement, because BakerStarrett will reconcile the Child Tax Credit when we prepare your 2021 return.
- Opt out of the advance payments: Some taxpayers may want to opt out of advance payments, and simply claim the child tax credit on the 2021 tax return. This can be useful in situations of joint custody, or situations where a family’s Adjusted Gross Income was below $150,000 in 2020, but will be substantially higher than $150,000 in 2021 ($112,500 if Head of Household, $75,000 if Single). To unenroll from Advance Payments, you will need to create an online IRS account. If you file your return with a “Married FIling Jointly” status, both spouses should create an account and both spouses need to unenroll from advance payments. https://www.irs.gov/credits-deductions/child-tax-credit-update-portal
- Consider an increase to pre-tax retirement contributions, or extra health savings account contributions if you are in the AGI phase-out range. If your family’s AGI is in the phase-out range (between $150,000 and $182,000 for children under 6, and between $150,000 and $170,000 for children between 6-17), and want to receive the maximum tax credit, you can consider increasing pre-tax retirement contributions to 401(k), 403(b), or IRA plans, as well as health savings account contributions.
WHERE THIS GETS COMPLICATED
In some situations, taxpayers that received an advance of the child tax credit (the monthly payments that start in July) may need to repay a portion of the credit when they file their 2021 tax return. We anticipate this may occur in some of the situations detailed below:
- Situations where parents share custody of their children. Only one parent will be eligible for the 2021 child tax credits. The parent that will not be claiming the child on the 2021 tax return should consider opting out of advance payments when the IRS launches the Child Tax Credit portal.
- A family’s adjusted gross income increases in 2021 to be higher than $150,000.
- If you/your spouse recently completed W-4 withholding forms anticipating full payment of the Child Tax Credit. This can sometimes lead to underwithholding, especially in situations when your child no longer qualifies for the full credit.
- You ordinarily have a small refund/small balance due on your tax return and claim the full child tax credit. Part of the credit you ordinarily receive on your tax return is going to be paid to you during the year (unless you opt out), so you may now owe/owe more with your 2021 tax return, particularly if you have multiple children under age 17.
- The IRS portal update tool itself: certain authentication is required to be able to use the IRS tool to opt out of advance payments. Unfortunately that means that you have to do this (we at BakerStarrett aren’t able nor allowed to!)
YOU’VE READ THIS POST AND STILL HAVE QUESTIONS
BakerStarrett provides tax planning for many of our clients. While this is a service we charge for, a tax plan can help families that are concerned about being underwithheld, as well as help your family create a plan to maximize the child tax credit in 2021. You can schedule a tax planning appointment by calling our office at 641-236-8083.