Making Finances Simple. Changing Lives.
The American Rescue Plan Act (ARP) that went into law this past March expands the existing Child Tax Credits. The credits are now increased and advanceable. But should you take advantage of having the credits paid in advance of your tax return filing?
Child Tax Credit Changes
ARP increased the maximum Child Tax Credit in 2021 to $3,600 for qualifying children under 6 years old and up to $3,000 for qualifying children between 6 and 17 years old. Prior to ARP, the credit topped out at $2,000 for qualifying children, and the credit ended at age 16.
The max credit is available to taxpayers with modified adjusted gross incomes of $75,000 or less for single filers…$112,500 or less for heads of household…and $150,000 or less for married couples filing joint tax returns. If these income limits are exceeded, reduced credits can be received for the extra amount above the prior $2,000 credit (the extra $1,600 or $1,000 per child is reduced by $50 per $1,000 of income above the thresholds).
Families who earn above the phaseout thresholds may still qualify for the regular Child Tax Credit that was in place prior to ARP. This allowed for single filers earning up to $200,000 and married joint filers earning up to $400,000 to receive credits of $2,000.
Lastly, the new credit is fully refundable in 2021, meaning eligible families can receive the credit regardless of their IRS tax liability.
IRS Sending Letters
More than 36 million families are already receiving letters based on their eligibility as shown on previously filed tax returns (either 2019 or 2020). These letters are providing indication of possible eligibility, as well as preparing families for the second letter they’ll receive that provides an estimate of their monthly payment, which begins July 15th. The monthly payments are sent out for half of the total allowable credit, and are divided into six payments paid in cash, from July through December. The remaining credits would be claimed on your 2021 tax return.
Most families need not take action to receive the payments. The IRS will calculate the amount based on the 2020 return, or 2019 if that is the most recent on file. Therefore, those who haven’t filed a 2019 or 2020 tax return should file soon if they’d like the advanced payments. This also ensures the IRS has the most recent banking info on file, as well as information on new dependents.
IRS Website Tool
The IRS is working on a special Advance Child Tax Credit page at this link in order to provide up-to-date info on these payments. This page will allow families to utilize an eligibility tool, as well as also providing families with an opt out feature and payment status tracker.
Should You Take the Advanced Credit?
Like the healthcare credits over the past several years, there can end up being a credit payback with the tax return filing. That’s because the extra $1,600 or $1,000 per child advanced credit contains income limitations that are ultimately based on 2021 tax return figures. While the 2019 & 2020 tax returns may be used to calculate possible advanced credits, these credits can end up having to be paid back if income limits end up exceeding thresholds on the 2021 tax return.
** If your 2021 modified adjusted gross income may exceed the limits, you may want to opt out of the advanced credits in order to avoid having to pay them right back with your 2021 tax return filing. Even if you opt out and eventually qualify, you can always capture the credits with your 2021 filing. So unless you absolutely need the funds advanced, you may be better off just receiving the benefit through your tax return filing.
*** As with the stimulus payments, it’s very important you track any payments received so you can properly report and reconcile on your 2021 tax return. This will eliminate IRS letters adjusting your tax return for incorrect amounts reported.
Contact us if you have questions as it pertains to your specific situation…we’re happy to help!