Advanced Child Tax Credit: What it is, who its for and if you should opt out!
If you claimed child dependents on your last filed return (2020 or 2019) then you'll be receiving notices for advanced child tax credits. Everyone is automatically opted into this and the IRS has given options to opt out.
What is the Advanced Child Tax Credit?
The child tax credit increased from $2,000 up to $3,000-$3,600 for 2021 under the American Rescue Plan Act. They decided to give advanced payments to parents monthly starting this month (July). Half the payments will come in advance for 6 months, and then the remainder will be claimed on the tax return for 2021.
Starting on July 15th you may start seeing small deposits into your bank account from the IRS.
If you're eligible, you could receive part of the credit in 2021 through advance payments of up to:
$250 per month for each qualifying child age 6 to 17 at the end of 2021.
$300 per month for each qualifying child under age 6 at the end of 2021.
If you make more than the income thresholds below then your credit begins to phase out:
$150,000 if married and filing a joint return or if filing as a qualifying widow or widower;
$112,500 if filing as head of household; or
$75,000 if you are a single filer or are married and filing a separate return.
Fortunately the IRS put together multiple tools to see if you qualify, opting in (if you are a non-filer), managing payments etc.
Why are they doing this?
The purpose of the increase is of course to financially assist taxpayers due to the pandemic (its a bit small but whatever). And the advance payments are to help taxpayers NOW instead of when they would ordinarily receive the credit in tax season in 2022. This way it can supplement for monthly bills as needed.
This sounds great! What does it mean for me as a business owner?
This credit is refundable (meaning you don’t have to pay it back) and will offset your tax liability. Something to consider is that if you typically owe taxes or pay estimates because you are a self employed person/business owner then receiving these payments is really just moving funds around and the advance payments aren’t very helpful.
If you’d like to receive them in advance that’s fine, just know that it’ll be that much MORE you will pay for 2021. Think of these payments as simply credits against what you will ultimately owe in taxes as a whole.
Who should opt out?
If you generally owe and the credit will help reduce your tax liability at the end of the year, it would make sense to opt out of receiving these advance payments because you'll just end up with a larger tax bill. Note that BOTH parents must opt out if you file joint. Surprises suck - and having to pay this back unexpectedly will be a burden.
If you don't plan to claim your dependents this year and they send you payments then you MAY need to repay the advance payments back which would be an awful surprise.
There is repayment protection if you received more than you qualify for…
If you make under certain thresholds and received payments on a dependent you aren’t claiming in 2021 - the IRS put together a repayment protection plan that could avoid you from having to repay the excess payments. We are waiting on guidance on how this will be reconciled on the tax return, so I would give caution to accepting payments you know are in excess of what you are owed.
Confused and not sure what to do?
Use the IRS tool to see if you qualify
Consider if you would rather get the $$ in these increments or in a lumpsum
If you generally owe - I would lean towards opting out
Talk to your tax professional!
PS. The super model in the photo is my baby niece - she destroyed that cake!
