On March 11, 2021, the American Rescue Plan Act became law. It required the IRS to establish a program to help taxpayers with children. The IRS will begin sending payment to taxpayer with children on July 15th and will continue making periodic advance payments through December 2021, that equals, in total, half of the IRS’s estimate of the eligible taxpayer’s 2021 child tax credit (CTC).
The child tax credit payments amount to $3,000 annually per child ages 6 to 17 and $3,600 annually for children under 6., (up from $2,000 in 2020). The credit is income-based and starts to phase out for individuals earning more than $75,000 a year or $150,000 for those married filing jointly. Eligible families will receive half of their credit in the form of monthly payments of up to $250 per school-age child and up to $300 per child under 6 from July through December 2021. The other half will be paid out when they file their 2021 income tax return. If you want to know if you are eligible to receive the Child Tax Credit, check out the Child Tax Credit Eligibility Assistant which allows families to answer a series of questions to determine if they qualify for the advance credit.
It is important to understand that the IRS is pre-paying a tax credit that you would usually receive when you file your taxes. Even though the total credit is more than the 2020 child tax credit, you will be potentially receiving less at tax time, which will affect how much you owe.
The IRS’ Child Tax Credit Update Portal was launched on June 21st, which includes the non-filer sign-up tool and an unenrollment feature for families to opt out of receiving the monthly payments. Coming soon, families will be able to use the Child Tax Credit Update Portal to check the status of their payments and update their bank account and mailing address. Later this summer and fall, individuals will be able to use this tool for things like updating family status and changes in income.
Why would I want to unenroll?
There are many families who could be affected by this. Instead of receiving these advance payments, some families may prefer to wait until the end of the year and receive the entire credit as a refund when they file their 2021 return.
This would be advisable if, for example:
Your income in 2021 is too high to qualify you for the credit.
You switched to a higher-paying job.
Your spouse went back to work after being unemployed for most or all of 2020
Someone else (an ex-spouse or another family member, for example) qualifies to claim your child or children as dependents in 2021.
Your main home was outside of the United States for more than half of 2021
Filers who don’t usually receive a refund, the advance payments could actually cause them to owe more when they file their 2021 taxes.
Any reason you could be in a higher tax bracket next year, which could change your tax math.
More helpful details are included HERE on the National Association of Tax Professionals' blog.
If you need help deciding if you should unenroll from this program, please give our office a call to schedule your mid-year tax review.