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Receive a letter from the IRS about Child Tax Credits? Let us answer your questions.

Eligible parents will soon begin receiving payments from the federal government. The IRS announced that the 2021 advance child tax credit (CTC) payments, which were created in the American Rescue Plan Act (ARPA), will begin being made on July 15, 2021, and have recently mailed letters to the people who may be potentially eligible for the credit.

The IRS is in the process of setting up an online system where taxpayers can report additional dependents or opt out of the advanced child tax credit.

How have child tax credits changed?

The ARPA temporarily expanded and made CTCs refundable for 2021. The law increased the maximum CTC — for 2021 only — to $3,600 for each qualifying child under age 6 and to $3,000 per child for children ages 6 to 17, provided their parents’ income is below a certain threshold.

Advance payments will receive up to $300 monthly for each child under 6, and up to $250 monthly for each child 6 and older. The increased credit amount will be reduced or phased out, for households with modified adjusted gross income above the following thresholds:

  • $150,000 for married taxpayers filing jointly and qualifying widows and widowers;
  • $112,500 for heads of household; and
  • $75,000 for other taxpayers.

Under prior law, the maximum annual CTC for 2018 through 2025 was $2,000 per qualifying child but the income thresholds were higher and some of the qualification rules were different.

Important: If your income is too high to receive the increased advance CTC payments, you may still qualify to claim the $2,000 CTC on your tax return for 2021.

What is a qualifying child?

For 2021, a “qualifying child” with respect to a taxpayer is defined as one who is under age 18 and who the taxpayer can claim as a dependent. That means a child related to the taxpayer who, generally, lived with the taxpayer for at least six months during the year. The child also must be a U.S. citizen or national or a U.S. resident.

How and when will advance payments be sent out?

Under the ARPA, the IRS is required to establish a program to make periodic advance payments which in total equal 50% of IRS’s estimate of the eligible taxpayer’s 2021 CTCs, during the period July 2021 through December 2021. The payments will begin on July 15, 2021. After that, they’ll be made on the 15th of each month unless the 15th falls on a weekend or holiday. Parents will receive the monthly payments through direct deposit, paper check or debit card.

Should I Opt Out? 

Tax planning is even more critical for families with children with this new plan. For example, a family with 3 children over the age of 6 will now receive $9,000 of child tax credits instead of $6,000 that they received in tax year 2020. However, $4,500 of the credit will be an advanced payment, so if the taxpayer normally receives a refund of $1,000, they will now end up owing $500 due to getting the credit in advance.

If your income is below $150,000 in 2020, but will be above $150,000 in 2021, then you will also want to opt out, or else you would need to pay back the advanced credit on your 2021 taxes.

Since these planning issues are becoming more critical, reach out to your YHB Advisor today!

© 2021

About the Contributing Author

Nick Preusch, CPA, JD, LLM, MSA

Nick joined YHB in 2020 with over 15 years of experience in the industry. Nick is a graduate of Carthage College with a BS in Accounting and Business, the University of Connecticut with an MA in Accounting, Case Western Reserve University with a JD, and Georgetown University with an LLM in taxation. Nick has also worked with the Internal Revenue Service as a Revenue Agent and an Attorney with the IRS Office of Professional Responsibility.

Nick’s expertise includes helping high wealth individual and large business entities with complex tax compliance, along with specializing in international, non-for-profit tax issues, and tax ethics issues.