Under the American Rescue Plan Act, taxpayers who qualify for the child tax credit are eligible to receive advance payments of the credit beginning in July 2021, based on 2020 income. For many Americans, these advance payments will provide a valuable cash infusion each month. For others, they could create a tax headache when it comes time to file 2021 income tax returns. Taxpayers are permitted to opt out of the advance payments, but they have to act quickly to take advantage of the option — or risk an unanticipated tax bill in 2022.
Advance Child Tax Credit Payments: The Basics
Eligible taxpayers don't have to take any action to receive the refundable tax credit payments on the 15th of each month. Monthly payments will total up to $300 for each child under age 6 and up to $250 per month for each child 6 and older (the child must be younger than age 18 as of Jan. 1, 2022 to qualify). Depending upon the information the IRS has on file, payments will be made via direct deposit, paper check or debit card.
The credit can be reduced to a total of $2,000 per child (annualized) if the taxpayer earns more than $150,000 (joint returns), $112,500 (heads of household) or $75,000 (single filers). The credit can be further reduced for taxpayers who earn at least $400,000 (joint) or $200,000 for all other filing statuses.
In total, advance payments for the year will equal up to 50% of the amount the taxpayer is eligible to receive based on 2020 filing information (2019 information if 2020 tax information is not available). If, based on 2021 tax information, the taxpayer was not eligible to receive the advance payments, the IRS will require repayment. The taxpayer's otherwise available refund can be reduced, or the taxpayer may owe for underpayment.
According to new IRS guidance, taxpayers who were not otherwise required to file tax returns for 2020 can file simplified returns for 2020 to receive monthly advance payments of the expanded child tax credit. Those taxpayers can file Form 1040, Form 1040-SR or Form 1040-NR, providing information such as Social Security numbers and addresses on the returns and must write "Rev. Proc. 2021-24″ on the forms. Taxpayers who had $0 in adjusted gross income (AGI) can report $1 in AGI in order to file electronically and qualify for advance payments.
Should You Opt Out?
Every taxpayer's situation is different. It's possible that some clients may appear to qualify for the child tax credit based on reduced income during the COVID-19 pandemic in 2020. If the client no longer qualifies based on a rebounded 2021 income (or if the child turns 18 before Jan. 1), they'll end up with a lower refund or an unexpected tax bill.
Some clients may qualify for the child tax credit but not need the advance payments to make ends meet. It's possible that those clients may rely on a refund at tax time to make large purchases or pay down debt. Those clients should be advised that they'll likely have a smaller refund if they accept the payments in 2021.
