In a prior blog post, Do the 2021 Changes to the Child Tax Credit Impact You? – Better Financial Counseling Network, I talked about some tax changes from The American Rescue Plan Act (ARPA) of 2021 which many families and many taxpayers will find helpful. However, some should do a bit of analysis to avoid any unpleasantness when filing their 2021 tax return.
The key factor I’ll look at here is the Advance on the Child Tax Credits in the law means that Taxpayers may receive part of child tax credit in 2021 before filing their 2021 tax return. The total advance payments may be up to 50% of the child tax credit. Payments will start in July and go through December and will be based on the 2020 tax return filing (or 2019 if you haven’t filed the 2020 return in time). Advance Child Tax Credit Payments in 2021 | Internal Revenue Service (irs.gov)
Unfortunately the advance child tax credits – these monthly payments – can be a problem for some taxpayers. For most it will be beneficial and helpful, but for others, some thought and planning will need to be done.
Once the IRS sets up the methods to do those things. They haven’t yet. Taxpayers will be able to: Opt Out of the advance payments or Adjust the factors that go into the calculation (such as filing status, number of qualifying children, income) for the advance payments
Who might want to opt out or make an adjustment to the factors?
- If getting the advance child tax credits “early” will cause you to owe taxes when filing your tax return.
- If you claimed a qualifying child in 2020 whom you are not going to claim for 2021. This may be the case for parents whose divorce agreements have you alternate which parent claims the child each year. Note: If you get the advance child tax credit monthly payments and it turns out you don’t claim the qualifying child for tax year 2021 –you will pay it back when filing your 2021 tax return. Either you will get a smaller tax refund or you will owe taxes when filing your tax return.
- If you have had a change to your filing status.
- If your 2021 income will be higher than previous years AND pushes you into the phase out or makes you ineligible for the Child Tax Credit.
- If you prefer big tax refunds. Coming Soon: Why a Big Refund isn’t Necessarily a Good Idea.
Note: If you don’t adjust your information and your 2021 status, qualifying children, income level, etc. changes your eligibility for the advance that you received, you will pay it back when filing your 2021 tax return. Either you will get a smaller tax refund or you will owe taxes when filing your tax return.
I urge you not to “roll the dice” on this. Take a look at your tax situation and if it makes sense to opt out of advanced monthly payments or to make an adjustment when the IRS provides a method, then take the appropriate action. Consult your tax advisor or an IRS Enrolled Agent to assist.
Coming Soon: How to opt-out of IRS Advance Payments of Child Tax Credit