If you have children under 18, you may have already received your first advance child tax credit payment, either by check or by direct deposit. However, keep in mind you would have received this credit on your 2021 tax return when you file anyway. While we’ve discussed the Advance Child Tax Credit previously, now that the government is issuing payments, we thought we would revisit if it makes sense to opt out of the credit.

What is the advance credit?

The American Rescue Plan Act of 2021 authorized advance credit payments for one year only (2021). The monthly payments are automatically made to all qualifying individuals unless they go to the IRS website and opt-out. The Biden Administration estimates that 39 million families are qualified for the advance payment, with about 2.6% opting out of the first payment (July 15, 2021).

The estimated payments are determined based on a taxpayer’s family makeup (number of children and filing status) and income, using information from 2020 tax returns (or 2019 if the 2020 return hasn’t yet been filed).

A taxpayer whose advance credit payments exceed what their actual credit turns out to be will need to repay the excess with their 2021 tax return.

Who might want to opt out?

Some taxpayers may be in for an unpleasant surprise when they discover they were not qualified for the advance payments they received. There are several scenarios where this could happen, such as:

1. A change in the number of qualified children, for example, due to a divorce
2. The children’s ages disqualify them for the credit, or reduce their credit
3. The taxable income on the 2021 tax return is more than what was reported in prior year(s), thereby reducing or eliminating the credit due to the income thresholds

Example: On their 2020 tax return Harry and Mary claimed two children, one age two and the other age seven, and their income was under the $150,000 threshold. Thus, for 2021 they would have a child age three and another age eight, and the IRS would estimate their credit for 2021 to be $6,600 ($3,600 + $3,000). Therefore, their advance monthly payments would be $550 ($6,600 x 50%) divided by six months. 

In 2021, Harry and Mary both received pay increases pushing their income above the income thresholds. With their higher income, they are no longer eligible to receive the credit. As a result, they would have an additional tax due of $6,600, the amount of the advance credit received.

If you’ve received advance child credit payments, in January 2022 the IRS will send you a letter recapping the amount of advance credit they sent you. This information will be needed when reconciling the advance credit payments with the actual credit on your 2021 return.

Contact Cray Kaiser at (630) 953-4900 if you have questions about how the advance payments may impact your 2021 tax return, whether you should opt-out of additional advance payments, or if you want to adjust your withholding or estimated tax payments to account for the advance credits.