The Internal Revenue Service this week is sending families the first monthly installment of an Advance Child Tax Credit, as promised in the $1.9 Trillion American Rescue Plan Act of 2021(ARP) signed by the President in March of this year. The legislation changed the way the Child Tax Credit is implemented for the 2021 tax year only, allowing the IRS to send monthly payments to families instead of waiting until they file their tax forms at year’s end. In addition, the bill expands eligibility to include families who will not owe Federal income tax this year, so that nearly 90% of families will be eligible for the credit.
What is the Child Tax Credit for 2021?
The enhanced Child Tax Credit is up to $3,600 per child up to the age of 5 years. For children ages 6 to17, the credit totals up to $3,000 per child for the year. Under the ARP Act, the IRS is sending monthly advances to families equal to half of the total credit, with the remainder of the credit available at year’s end when the family files a 2021Federal 1040 return. From July to December, 2021, families can expect payments of between $250 to $300 per month (depending upon age) for each eligible child. Children who reach the age of 18 prior to the end of 2021 may not be eligible for the credit.
There are income limitations that reduce or eliminate the credit for higher incomes. For example, you should be eligible to receive the entire credit if your Modified Adjusted Gross Income is below:
- $75,000 for single taxpayers or those who are married by filing separately
- $112,500 for married, head of the household filers
- $150,000 for married filers who file jointly.
Filers who earn above these income thresholds will see the credit phase out, reducing by $50 for every $1,000 in income earned above the limit.
Why Some Families May Want to Opt Out
For some Americans, the advance credit is a welcome way to inject extra cash into the monthly budget. For others, it may trigger an unpleasant tax bill at the end of the year. Since eligibility for the credit is based upon your 2020 income and payment history, the IRS does not know if your 2021tax liability will be greater than or less than the prior year. For this reason, taxpayers may want to opt out of advanced payments if:
- You expect to earn more money in 2021 than last year
- You tend to owe the IRS at the end of the year
- You have children that are aging out of credit eligibility this year
- You are divorced and share custody.
By acting now and stopping the advance payments, you may still apply for the credit at year’s end without penalty. The big difference, of course, is that you can mitigate some or most of the tax impact these advance payments might yield.
How to Opt-Out with the IRS
If you have determined that the Advance Child Tax Credit is not in your best interest, there is still time to opt-out of receiving future payments from the IRS. To manage your options, visit the IRS following this link.
If you are unsure about your best plan of action and need to speak with a CPA for some tax consulting on this matter, please don’t hesitate to reach out to Whipplewood by clicking here.