Advanced Child Tax Credit

There has been a lot of buzz in the news lately about the Advanced Child Tax Credit.  First, a bit of background – the credit has been around since 1998.  While it can reduce income tax to zero, it does not reduce self-employment tax.  You cannot receive excess credit as a refund.

For 2021, the Child Tax Credit was increased to up to $3,000 per qualifying child between the ages of 6 and 17 as of December 31, 2021.  For children under age 6 at the end of 2021, the credit is $3,600 per qualifying child.  Normally, you would claim this credit when you file your tax return.  This year, qualifying parents will receive up to 50 percent of the credit in monthly payments, beginning July 15.

Key things to remember:

  • The advance payments will reduce the amount of credit on your 2021 personal tax return. For example, you have a 10-year-old child and received a $2,000 credit on your 2020 tax return.  The 2021 credit is $3,000; however you will receive $500 per month in advanced credits from July through December.  When your 2021 return is prepared, your remaining credit will be $1,500.
  • You may op out of receiving the advance payments. Why would you consider this step?
    • The credit is based on your 2020 personal income tax return. If your 2021 income is significantly higher than it was in 2020, you may find that you are not eligible for the credit and would have to repay the advance amount.
    • If you are in an alternating custody situation, remember that the payments are based on the most recently filed tax return. If you claimed children in the even years, the advance payments automatically start July 15.  They will have to be repaid when your 2021 return is filed.
  • How do you opt out? Visit https://www.irs.gov/credits-deductions/child-tax-credit-update-portal.  To access the portal, you must first verify your identity. If a person has an existing IRS username or an ID.me account with a verified identity, they can use those accounts to easily sign in. People without an existing account will be asked to verify their identity with a form of photo identification, usually your driver’s license, using me, a trusted third party for the IRS. Identity verification is an important safeguard and will protect your account from identity theft.  This portal also allows taxpayers to unenroll or opt out from receiving the monthly payments.

In time, you will also use the portal to add or subtract the number of qualifying children (in the event of a birth or adoption this year), report a change in your marital status and report a change in your income.  All of these events will affect your credit amount.  When the portal is updated, you may also use it to update or all your banking information or mailing address.  For more specific information, go to https://www.irs.gov/credits-deductions/2021-child-tax-credit-and-advance-child-tax-credit-payments-frequently-asked-questions.

If you have questions regarding this or any other tax topic, please contact us at info@alleybradl.com or call 937-606-2722.