After more than a year of stimulus payments, it is tempting to lump the new advance Child Tax Credit payments into the same category. But unlike the economic impact payments, some taxpayers may have to pay back some or all of what they received. Read on to find out if this might affect you, and the steps you can take now to avoid a large repayment.
What are the Advance Child Tax Credit Payments?
The American Rescue Plan Act (ARPA) increased the child tax credit from $2,000 to $3,000, and $3,600 for children under 6. It also increased the age of eligible children to 17 and made the credit 100% refundable (which means taxpayers get a refund even if the credit exceeds their total tax bill). However, the additional child tax credit is subject to a lower phaseout threshold. Taxpayers over that threshold but under the existing threshold will get the current $2,000 per child.
The act also directed the IRS to payout 50% of the amount the agency estimates taxpayers are eligible for in monthly installments beginning in July. The IRS will be base the estimates on 2020 tax returns but qualifying for the credit will ultimately be determined by the 2021 tax return.
Parents with children aged 5 or under may be eligible for advance payments of up to $300 per month; parents with children between the ages of 6 and 17 may receive monthly payments of $250 per month. The remaining 50% of the credit will be claimed on the 2021 tax return.
If the IRS has your banking information, the payments will be sent out as a direct deposit. Otherwise, you will receive your payment by mail.
Who is eligible?
Anyone who lives in the U.S. for more than half the year, who has a qualifying child, and whose income is below the following income threshold levels is eligible for the full $3,000/$3,600.
- $150,000 if married and filing a joint return or filing as qualifying widow or widower
- $112,500 if filing as head of household
- $75,000 if single or filing as married filing separately
Taxpayers who exceed these thresholds but are under the existing thresholds of $400,000 for joint filers and $200,000 for all other filers will continue to receive the $2,000 per child tax credit.
What happens if I receive more than I’m eligible for on my 2021 tax return?
Unlike the stimulus payments received during the pandemic, these monthly payments are an advance on the Child Tax Credit that will be claimed when you file your 2021 tax return. This means that any excess advance payments you receive between July and the end of the year will be subtracted from your refund or added to the amount of federal tax you owe. Therefore, if you qualify based on your 2020 tax return, but not on your 2021 tax return, you will have to pay the money back!
Can I opt-out of receiving advance Child Tax Credit payments?
Yes! The IRS has a dedicated tool for managing payments. At present, this tool only allows taxpayers to verify that they are enrolled, update banking information, or unenroll from payments. Eventually, this tool will allow taxpayers to make changes to their filing status, dependents, income, and to re-enroll. The deadline for opting out of the July payment was June 28. Here are the deadlines for making changes for future payment dates:
- August 13 payment: unenroll by 8/2/2021
- September 15 payment: unenroll by 8/30/2021
- October 15 payment: unenroll by 10/4/2021
- November 15 payment: unenroll by 11/1/2021
- December 15 payment: unenroll by 11/29/2021
Who should consider unenrolling from advance Child Tax Credit payments?
You might want to unenroll if any of these situations apply to you. If you filed a joint return in 2020, both spouses will need to unenroll separately.
- Your income rose in 2021. The IRS will be estimating payments based on your 2020 tax return. If your 2021 income is anticipated to rise above any of the above phase-out limits, you may want to unenroll.
- You generally owe tax when you file your tax return. Because these payments are an advance on the Child Tax Credit, any payments you receive may increase the amount of federal tax you owe when you file your 2021 return.
- Your marital or filing status will be different this year. If you are divorced or married in 2021 or will be filing your 2021 return using a different filing status, this may change the amount you will be eligible for when you file your 2021 return.
- Your dependents will change this year. Divorced couples with split custody arrangements may need to unenroll if they will be claiming different dependents on their 2021 tax returns. Taxpayers with children who will be aging out of the credit may also want to unenroll. Eventually, the IRS tool for managing payments will allow taxpayers to update filing status and dependents, but as of now, that change is not available.
- You would prefer one lump sum payment: If you opt-out of the monthly payments, you will still get the funds if you end up qualifying in the form of a tax “payment”, which you can apply to other tax due, apply to 2022 estimates, or receive in a refund.