Eric Kipperman •
The Advance Child Tax Credit Payment is a useful tool to allow early access to this credit that you normally would only receive when you file your return. Receiving these payments can be helpful to free up some cash to make things a bit easier now, after dealing with all of the financial hardships associated with the COVID-19 pandemic. For some, opting out of the payments makes more sense. If you rely on the Child Tax Credit to meet your tax obligation then you would want to opt out of the Advanced Child Tax Credit Payment as this will reduce the amount of credit available to claim on your 2021 tax return.
The Advance Child Tax Credit Payment is a useful tool to allow early access to this credit that you normally would only receive when you file your return. Receiving these payments can be helpful to free up some cash to make things a bit easier now, after dealing with all of the financial hardships associated with the COVID-19 pandemic. For some, opting out of the payments makes more sense. If you rely on the Child Tax Credit to meet your tax obligation then you would want to opt out of the Advanced Child Tax Credit Payment as this will reduce the amount of credit available to claim on your 2021 tax return.
If you know you are going to make more than the first phase-out of $150,000 or second phase-out of $400,000 in 2021 compared to 2020, then you may want to wait on the payments. Waiting might be the most viable option because the credit that you receive is based on your 2020 return. This can create a situation where you owe the IRS additionally for the difference between the phase out and credit received.
For this updated credit they are increasing the qualified child (6-17) base from $2,000 in 2020 to $3,000 in 2021, and younger qualified children (5 and under) will receive $3,600, without changing the $500 nonrefundable credit for other dependents and qualifying children (not under 17).
Let’s pretend you are married filing joint for 2020, you received the full amount of the credit for Child A (age 15) of $2,000 plus the $500 for Child B (age 18). So if you claim Child A and Child B next year you would be looking at a credit of $3,500. If you were to receive this credit in advanced payments it would be $3,000/2=$1,500 (half year). Note that only the child tax credits are being advanced.
$1,500/6=$250 which is what your monthly payment would be through December 2021, and you would be able to claim the other $1,500 in child tax credit (plus the $500 other dependents credit) when you file your 2021 taxes.
If you think your income will remain relatively constant for 2021 it may not hurt to take the advanced payment to free up some cash throughout the year if you need, depending on the amount you owe or refund received. But remember that any advanced payments that you receive will reduce the amount of Child Tax Credit that you will be able to claim on your 2021 tax return so your anticipated refund may be reduced.
You should be aware that the IRS is automatically issuing these advance payments based on 2020 tax return filings. If you need to update your banking information or opt in or out of credit, you should visit their dedicated webpage which now has a helpful portal where you can log in and change your information for payments beginning in August.
Please reach out to us if you have any questions or would like help in analyzing your tax situation relating to the Advance Child Tax Credit Payment.
For this updated credit they are increasing the qualified child (6-17) base from $2,000 in 2020 to $3,000 in 2021, and younger qualified children (5 and under) will receive $3,600, without changing the $500 nonrefundable credit for other dependents and qualifying children (not under 17).
Let’s pretend you are married filing joint for 2020, you received the full amount of the credit for Child A (age 15) of $2,000 plus the $500 for Child B (age 18). So if you claim Child A and Child B next year you would be looking at a credit of $3,500. If you were to receive this credit in advanced payments it would be $3,000/2=$1,500 (half year). Note that only the child tax credits are being advanced.
$1,500/6=$250 which is what your monthly payment would be through December 2021, and you would be able to claim the other $1,500 in child tax credit (plus the $500 other dependents credit) when you file your 2021 taxes.
If you think your income will remain relatively constant for 2021 it may not hurt to take the advanced payment to free up some cash throughout the year if you need, depending on the amount you owe or refund received. But remember that any advanced payments that you receive will reduce the amount of Child Tax Credit that you will be able to claim on your 2021 tax return so your anticipated refund may be reduced.
You should be aware that the IRS is automatically issuing these advance payments based on 2020 tax return filings. If you need to update your banking information or opt in or out of credit, you should visit their dedicated webpage which now has a helpful portal where you can log in and change your information for payments beginning in August.
Please reach out to us if you have any questions or would like help in analyzing your tax situation relating to the Advance Child Tax Credit Payment.
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