If you have kids you've probably heard about the big increase in the 2021 Child Tax Credit. The maximum credit has been bumped from $2,000 per child to $3,000, or $3,600 for a child under 6. What's more the IRS plans to advance half of any eligible child tax credit in the form of 6 monthly payments beginning on July 15th. The remainder of the credit will be applied when you file your 2021 tax return. For many struggling parents, money in hand from these advance payments will be most welcome.
It's easiest to think of this year's Child Tax Credit as two credits combined into one.
Regular Credit
The existing Child Tax Credit is $2,000 per child under 17. It begins to phase-out (be reduced) for adjusted gross incomes above $400,000 for married taxpayers filing jointly, and $200,000 for other taxpayers.
Additional 2021 Credit An additional credit of $1,000 per child under 18 and $1,600 per child under 6 has been added for 2021. This additional credit phases-out for incomes above $150,000 for married taxpayers filing jointly, $112,500 for head-of-household filers, and $75,000 for other filers.
Combining the two credits results in a maximum 2021 Child Tax Credit of $3,000 per child, or $3,600 per child under 6. By default you will automatically receive 6 advanced payments comprising 50% of your eligible credit. The maximum credit will equate to $300 per month for each qualifying child under age 6 and up to $250 per month for each qualifying child ages 6 to 17. The IRS will soon be sending letters confirming eligibility and advance payment amount based on the income and dependent information from your 2020 or 2019 tax return.
Kiplinger has an excellent Child Tax Credit estimator.
Child Tax Credit Update Portal (CTC UP)
By July 1st, the IRS will also make a special portal available for taxpayers to update any changes to their 2021 estimated income and dependent information. Important: taxpayers who were not required to file a recent tax return can use the portal to enter their information and possibly qualify for the Child Tax Credit and advance payments.
You will also be able to opt-out of the advanced payments and receive the full eligible Child Tax Credit as a traditional lump sum when you file your 2021 taxes. Look for more information about the portal launch at www.irs.gov/childtaxcredit2021
Update: The Child Tax Credit for non-filers function has just launched. Use this tool ONLY if you were not required to file a 2020 return. The information update for filed 2020 returns and the advance payment opt-out functions are still to come. Stay tuned.
Update: The IRS has launched the anticipated second portal which allows taxpayers to verify eligibility for the Child Tax Credit and to opt-out of receiving advance payments. You will also be able to view and monitor your advance payment transactions after they begin on July 15th.
When Should You Update Your Income and Dependent Information?
When You Qualify For More Credit
If you expect a new dependent child or children in 2021, you should definitely use the portal and update your information in order to receive additional tax credit and advance payments. If the income from your 2020 return falls in the phase-out range or higher (see above), you will not receive the full 2021 tax credit. But if your anticipated income is lower this year, you should update your information. You might be eligible for more Child Tax Credit and advance payments because of your lower 2021 income.
When You Qualify For Less Credit
Conversely, if your anticipated 2021 income is greater than it was in 2020 then you might qualify for less tax credit and advance payments than you actually receive. Unlike the recent stimulus payments, overpayments of the Child Tax Credit advances that are due to changes in your income are not forgiven. They are required to be repaid. Update your estimated 2021 income on the portal to avoid this scenario.
Safe Harbor For Overpayment
A safe harbor or repayment protection amount of $2,000 per child has been established for taxpayers with modified gross incomes (MAGI) of under $40,000 single and $60,000 married filing jointly.
Details about the repayment protection worksheet calculation are still emerging but as of this writing. Taxpayers are encouraged to use the IRS portal to update any substantial changes to their 2021 incomes and avoid a repayment scenario.
When Should You Opt-Out Of Advanced Payments?
When You Prefer A Lump Sum
You might just be used to getting a lump sum tax refund every year and prefer it that way. Many taxpayers plan special purchases around their large refunds, family vacations, etc. It is also easier for most people to save a portion of a lump sum payment versus having the discipline to save an equivalent amount from smaller individual payments.
When Updating Portals Is Too Much Of A Hassle
Your 2021 information has changed but figuring it out and updating the IRS portal is too much of hassle. You might be worried about overpayments and having to pay them back. If this is the case, then opt-out of the advance payments and claim your full eligible Child Tax Credit when you file your tax return.
When You are A Divorced Or Unmarried Parent Sharing A Dependent
If you and your ex-spouse or partner alternate who claims a child each year for the Child Tax Credit, you need to pay attention. The advanced payments will go the parent who claimed the child and the Child Tax Credit on their 2020 return. To avoid receiving the tax credit two years in a row and creating a messy situation, you want to opt-out of the advance payments. The parent who's turn it is to claim the child this year (and who will likely benefit from the increased tax credit) should use the IRS portal to update their 2021 dependent information and receive the Child Tax Credit advance payments.
When You Owe Taxes
If you claim the Child Tax Credit but you still generally owe taxes or receive only a small refund at the end of each year, you should be aware of the possible consequences for taking the advanced payments. The maximum 2021 Child Tax Credit has gone up but it hasn't quite doubled. Simply put, if you are taking 50% of the increased credit in the form of advanced payments, that could leave a smaller net tax credit when you prepare this year's return. You might find yourself with a tax bill or a slightly bigger tax bill than you are accustomed.
Example 1: Last year you received a $2,000 Child Tax Credit for one 8 year old child. You still owed a small amount of taxes at the end of the year. This year your credit will be $3,000, but $1,500 will already be dispersed if you take the advanced payments. All other thing being equal, your tax bill at the end of the year will be $500 higher ($2,000 credit vs $1,500 credit).
Example 2: Last year you received a $4,000 Child Tax Credit for two children 5 and 8 years old. You received $500 tax refund. This year if you qualify your maximum credit will be $6,600, but $3,300 will already be dispersed if you take the advance payments. All other things being equal, you will receive $700 less ($4,000 vs $3,300) in tax credit when you file 2021 return. This would turn your $500 tax refund into a $200 tax bill.
These are relatively small effects but something to consider, especially if you generally owe taxes (and underpayment penalties) at the end of the year. Opting out of the advance payments might relieve some uncertainty. Taxpayers who micromanage withholdings (with the goal of zero tax owed and zero refund at year end) and who take the advance payments might consider a small increase in their withholdings to compensate for any reduced tax credit.
As always at Monadnock Tax Services we are happy to help individuals and families with friendly tax advice and services. Give us a call at (603) 722-0184 or email info@monadnocktax.com
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