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Child Tax Credit – What You Deserve to Know

There’s no doubt about it the Child Tax Credit, part of the American Rescue Plan Act, will provide the largest child tax credit in history. While this credit will provide some much-needed relief for parents and families, there are two sides to this proverbial coin. With the news all abuzz with the credits high points and lows, we’ve sorted through the facts and outlined the information you deserve to know before accepting these automatic payments.

Child Tax Credit Amounts, Eligibility, and Information for Non-Filers

For those with children, the Child Tax Credit provides between $2,000 to $3,000 per child for children six to 17 years old and between $2,000 to $3,600 for children ages five and younger. Families will receive the full credit if they have an adjusted gross income of $75,000 for singles or married filing separately, $112,500 for heads of households, or $150,000 for married filing jointly.

Those whose earnings exceed the set income thresholds will receive a credit that is reduced by $50 for each $1,000 earned over the maximum income qualifications.

The IRS has now created an online portal related to these child tax credit payments which can be found at https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021. This portal currently allows you to check your eligibility or opt-out of receiving the early payments of the credit.

You do not need to sign up or take any action to receive this credit. It will be sent to you automatically if you filed a 2019 or 2020 tax return, or received a stimulus check. However, if you did not file taxes in the past two years, you can still receive the benefits. Low-income families with children, including those who are not required to file taxes due to low earnings, are still eligible to receive the credit and can sign up by going to https://www.irs.gov/credits-deductions/child-tax-credit-non-filer-sign-up-tool.

When is it Happening

These payments are scheduled to start in July, and the advancement will be broken into six monthly payments. For every child six to 17 years old, families will receive $250 per month, and for every child under six years old families will receive $300 per month until the eligible credited amount has been fulfilled.

For those who receive their tax refunds from the IRS through direct deposit, the credit payments will be deposited in their bank account on the 15th of every month until the end of 2021. And for those who don’t use direct deposit, they will receive their payment by mail around the same time of the month.

What this Credit is Not

This child tax credit is not a new credit, it’s simply an early payment of a credit that you would otherwise receive on your 2021 tax return. The payments are a partial advance of a credit that would normally be claimed on next year’s tax return.

What to be Cautions of

The key importance to note is, if you receive these early payments, the credit available with your tax return will be reduced. This could result in additional taxes due with your return or reduced refund amounts because you have already received the tax benefit of the credit during the year.

The amounts you will automatically receive this year will be based on your 2019 or 2020 tax return; the credit you are eligible for in 2021 will be based on your actual 2021 income and tax return.  These amounts will be reconciled and adjusted on your 2021 tax return.

In some situations, divorced or separated couples may need to opt-out if their ex is scheduled to claim their child or children as dependents in their 2021 tax filings. Or if during the year you received more credit than you are actually eligible for, this amount will need to be repaid. Lastly, in the event your income or the number of dependents claimed fluctuates from year to year, there is a strong possibility that the advance payments you receive will be more than you are eligible for and therefore you the amount will need to be repaid to the IRS.

Our Suggestions

After reviewing the pros and cons of this credit advancement, our CPAs recommend opting out from receiving these advanced payments. Opting out does not change the amount of credit you will receive, only when you will receive it. While we’d all prefer to have a dollar today instead of a dollar next year, waiting to receive the actual credit on your 2021 tax return will reduce the likelihood of having to pay amounts back, or having an unexpected result when your 2021 tax return is finished.

 How to Opt-Out

If you would like to opt-out of this advancement visit https://www.irs.gov/credits-deductions/child-tax-credit-update-portal.  If filing as a married couple, both spouses will need to individually opt-out.

The deadline to opt-out of the July 15, automatic payment is this Monday, June 28.  If you miss this deadline, do not fret. The advancement of the credit will be paid in installments so if you opt-out after June 28, you may be able to stop any remaining future advancements before they are sent.

For additional assistance, the IRS has issued frequently asked questions about opting out, located at https://www.irs.gov/credits-deductions/2021-child-tax-credit-and-advance-child-tax-credit-payments-topic-j-unenrolling-from-advance-payments

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MBE CPAs PPP2 Qualification resource sheet can be downloaded here.