When Congress enacted the American Rescue Plan in early 2021, it increased the child tax credit and required half of it to be paid in advance via monthly payments. While it’s intended to help families with everyday expenses, there are tax considerations to keep in mind.
RECEIVED TOO MUCH?
Advance payments are based on the IRS’ estimate of your 2021 child tax credit using your most recent tax return. Generally, if the total payments received are more than the actual 2021 credit, you’ll need to repay the excess. There are repayment exceptions for some lower-income taxpayers.
Repayment could happen if you have a child you’ve previously claimed but who is now no longer your dependent or if your income increased and it’s now above the limits. The child tax credit begins to phase out for single taxpayers with adjusted gross income above $75,000 ($150,000 for married filing joint).
If you opted out of the advance payments, you’ll still be able to claim the credit on your 2021 tax return as you have in the past.
BREAK EVEN OR NO REFUND?
If you historically break even on your tax return, either owing very little or receiving a small refund, receiving advance payments may cause you to have to pay when you file your 2021 return.
For example, with a 10-year-old child, the credit was worth $2,000 in 2020, which lowered a family’s tax bill by that amount when they filed their return. In 2021, the credit will be $3,000 for the same child, but half was paid in advance. When the family files their 2021 taxes, there will only be $1,500 left of the child tax credit to lower their tax bill. Everything else being equal, they will owe $500 more in 2021 than they did in 2020.
Reach out to your tax professional to discuss how the advance child tax credit will impact your 2021 taxes.