Child Tax Credit Guide

 

Kids are expensive. The advance Child Tax Credit payments are here to help. But could this credit negatively affect your tax bill?

Many of my clients have been asking if they should be worried about making bank from the government. In today’s post, I’ll answer some of the common questions I’ve been asked and guide you through any steps you may need to take when claiming the Child Tax Credit.

How do I qualify for the 2021 advance Child Tax Credit payments?

In order to qualify for the advance Child Tax Credit payments, you and your spouse (if filing jointly), must meet these requirements:

  • You filed a 2019 or 2020 tax return and claimed the Child Tax Credit on the return or you gave the IRS your banking information in 2020 to claim the economic impact payment through the “Non-Filers: Enter Payment Info Here” tool.
  • You have a “main home” in the United States for more than half the year or you’re filing jointly with a spouse who has a “main home” in the United States for more than half the year.
  • You have a qualifying child with a valid Social Security number who is under the age of 18 at the end of 2021.
  • Your modified adjusted gross income (MAGI) for did not exceed these limits:
    • $150,000 if married and filing jointly or filing as a qualified widow(er)
    • $112,500 if filing as head of household
    • $75,000 if single or married filing separately

Do I qualify to receive the full Child Tax Credit amount?

Depending on your 2021 MAGI, you may not receive the full tax credit. The credit amount is reduced and phased out based upon set income amounts.

Why am I receiving the Child Tax Credit monthly instead of when I file my taxes?

As a result of the American Rescue Plan–an economic stimulus package–for tax year 2021, the IRS will pay half of the total Child Tax Credit amount to you in advance monthly payments that start on July 15, 2021. The other half of the credit will be claimed when you file your income taxes.

In other words, the monthly Child Tax Credit payment is really just a prepayment for half of the Child Tax Credit qualifying taxpayers would normally receive when filing their 2021 taxes. This tax credit can reduce the amount of taxes you owe or increase your refund. The American Rescue Plan temporarily changed the Child Tax Credit to a fully refundable credit of up to $3,600 per qualifying child under the age of 6 and $3,000 per child ages 6 through 17. Making this a refundable tax credit means that you will receive the money even if you do not owe any taxes.

When will I receive the advance Child Tax Credit payment? How much do I get?

The IRS started showing you the money on July 15, and they will continue to send monthly payments through December 15, 2021. Families will receive advance Child Tax Credit payments of up to $300 per month for each child under the age of 6 and up to $250 per month for each child ages 6 through 17. These payments will show up on your bank account or statement as coming from ACH CREDIT IRS TREAS 310 CHILDCTC.

Do I need to sign up for the advance Child Tax Credit payments? Where do I claim the Child Tax Credit?

If you qualify for the credit, the IRS will automatically use the information you’ve previously provided to send you the advance payments. The IRS will estimate the total amount of the Child Tax Credit you can claim based on your previous income and Child Tax Credit. You do not need to sign up or take any action to receive this credit.

What if I didn’t file taxes in 2019 or 2020? Do I still get the advanced Child Tax Credit payments?

First of all, if you are required to file taxes and haven’t yet, take care of that ASAP. Not filing could mean that you’ll miss out on the advance Child Tax Credit payments in 2021 as well as any tax benefits or refunds you may have received in previous years.

If you’re not required to file taxes and didn’t file in 2019 or 2020, the IRS has a special Child Tax Credit Non-filer Sign-up Tool that you can use to submit your information and register for the credit. You should not use this tool if you filed or plan to file a 2020 tax return or you don’t meet the requirements for receiving the credit.

What if the IRS sends me too much money for my Child Tax Credit?

You might be thinking, “Bank error in your favor. Collect $200. Cha-ching!” Unfortunately, if the IRS estimates your credit to be higher than what you actually are allowed, then you will have to repay any excess amount when you file your tax return (sorry!). These excess amounts might be due to a change in income, number of qualifying children, or marital status.

If you know that you’ve had a change that may result in excess payments, and you want to avoid having to repay money, then you can update your information through the IRS’ Child Tax Credit Update Portal.

However, if you received an excess payment due to a change in number of qualifying children and your income is below a certain amount, you may not have to repay the excess due to a repayment protection clause. You can qualify for the maximum repayment protection amount of $2,000 per qualifying child if your modified adjusted gross income (MAGI) on your 2021 income tax return is below:

  • $60,000 if married and filing jointly or filing as a qualified widow(er)
  • $50,000 if filing as head of household
  • $40,000 if filing single or married filing separately

When your income is above the amounts above, then the amount of repayment protection decreases. You cannot qualify for any repayment protection if your MAGI on your 2021 income tax return is above:

  • $120,000 if married and filing jointly or filing as a qualified widow(er)
  • $100,000 if filing as head of household
  • $80,000 if filing single or married filing separately

How do I stop advance Child Tax Credit payments?

If you do not want to receive advance payments, you can unenroll through the Child Tax Credit Update Portal. If you want to opt-out, you’ll need to do so before the first Thursday of the month in which a payment is being made. If you are married filing jointly, both you and your spouse must unenroll. If you don’t, then the spouse who didn’t unenroll will still receive half of the advance credit payment.

Should I stop advance Child Tax Credit payments?

There are really only two reasons why you may want to opt-out of the advance payments. First, if you expect that your 2021 income will be significantly higher than your 2020 income, then you may want to opt-out to avoid having to repay some or all of the credit.

Second, some of my clients would rather receive their entire Child Tax Credit at the end of the year either because they want a bigger refund or because they want to lower their total tax bill. If this is your philosophy as well, then you may consider opting out of the advance payments.

Basically, there is no real tax benefit to stopping or opting out of the advance Child Tax Credit payment because those who qualify for the credit will receive this fully refundable credit no matter what. The credit is not income, so the amount of taxes you pay will not be affected. You’re only choosing whether you’d like to have the money now or later.

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Amy Northard, CPA

The Accountant for Creatives
+ taxes + bookkeeping + consulting
+ Hang out with me over on Instagram!

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